PRIN 

JL      .JL.  VJt  JU  ™ 


CARVER 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

RIVERSIDE 


A 


PRINCIPLES  OF 
NATIONAL  ECONOMY 


BY 


THOMAS  NIXON  CARVER 


GINN  AND  COMPANY 

BOSTON     •     NEW    YORK     •     CHICAGO     •     LONDON 
ATLANTA     •     DALLAS     •     COLUMBUS     •     SAN    FRANCISCO 


COPYRIGHT,  1921,  BY  THOMAS  NIXON  CARVER 

ENTERED  AT  STATIONERS*  HALL 

ALL    RIGHTS    RESERVED 

621.0 


037 


tgfte   gUft 

(,I\N  AND  COMPANY  •  PRO. 
1'KIliTOKS  •  HUSTON  •  U.S.A. 


INTRODUCTION 

This  book  is  frankly  written  from  the  national  point  of  view. 
Someone  has  suggested  that  much  futile  discussion  would  be 
prevented  if  everyone  were  required  to  point  at  the  thing  of 
which  he  was  talking.  It  would  be  a  wise  rule  if  no  one  would 
ever  speak  or  write  about  "society,"  or  "the  community"  in 
general,  but  only  of  such  groups  as  can  be  named  and  located. 
The  United  States  of  America  is  such  a  group.  So  also  are 
England,  France,  Canada,  and  a  number  of  others.  These  and 
similar  groups  are  the  largest  that  are  capable  of  carrying 
through  definite  economic  policies. 

Not  only  is  this  book  written  from  the  national  point  of 
view;  it  is  frankly  a  theory  of  national  prosperity.  In  this 
respect  the  author  has  the  illustrious  example  of  the  great 
Adam  Smith,  whose  work  was  entitled  "An  Enquiry  into  the 
Nature  and  Causes  of  the  Wealth  of  Nations."  Prosperity  is 
assumed  to  be  desirable  and  worthy  of  the  highest  efforts  of  the 
scholar  in  economics  as  well  as  the  statesman.  It  is  believed 
to  require  not  only  an  ample  production  but  also  a  fair  distri- 
bution of  the  products  among  all  classes,  to  the  end  that  all  may 
share  in  the  national  prosperity. 

The  writer  may  be  accused  of  bringing  purely  ethical  con- 
siderations into  an  economic  discussion.  He  has  no  desire  to 
repudiate  the  charge,  certainly  not  on  the  ground  that  ethical 
considerations  are  unworthy  of  an  economist.  The  charge, 
however,  does  not  happen  to  be  correct,  unless  a  preference 
for  national  prosperity  as  against  national  poverty  can  justly  be 
called  an  ethical  preference.  The  author  pleads  guilty  to  this 
preference,  and  the  book  is  written  as  an  expression  of  it. 
Having  this  preference,  the  author  frankly  argues  for  those 


iv  PRINCIPLES  OF  NATIONAL  ECONOMY 

habits,  policies,  and  institutions  which  are  most  likely  to  con- 
tribute to  national  prosperity.  Assuming  that  others  have  the 
same  preference,  the  language  used  may  sometimes  be  that  of 
a  propagandist,  and  the  reader  may  even  be  exhorted  to  behave 
in  such  ways,  or  to  support  such  policies  and  institutions  as 
will  contribute  to  the  end  which  all  are  assumed  to  desire. 
These  exhortations,  however,  are  based  wholly  on  reasoning 
as  to  the  probable  effect  on  national  prosperity  of  the  habits, 
policies,  and  institutions  under  discussion,  and  never  on  senti- 
mental views  of  morality. 

Let  it  be  understood,  therefore,  that  this  book  is  written  for 
those  who  are  interested  in  the  problem  of  national  prosperity 
and  who  believe  that  this  should  be  the  aim  of  all  good 
citizenship.  It  is  also  written  for  those  who  are  not  too 
squeamish  to  consider  moral  questions  whenever  they  can  be 
shown  to  have  a  definite  connection  with  the  central  problem 
of  national  prosperity.  Finally  it  is  written  for  the  studiously 
inclined  and  not  for  those  who  merely  wish  to  find  support  for 
their  prejudices. 


CONTENTS 

PART  I.     THE  FACTORS  OF  NATIONAL  PROSPERITY 

CHAPTER  PAGE 

I.  WHAT  MAKES  A  NATION  PROSPEROUS 3 

II.  ECONOMIC  DESIRES 15 

III.  ECONOMIC  GOODS 38 

IV.  ECONOMIC  ACTIVITIES 47 

V.  CONTROL  OF  ECONOMIC  ACTIVITIES 72 

VI.  ECONOMIC  INSTITUTIONS 101 

VII.  THE  QUALITY  OF  THE  PEOPLE 123 

VIII.  THE  GEOGRAPHICAL  SITUATION 141 

PART  II.     ECONOMIZING  THE  FACTORS  OF  PRODUCTION 

IX.  THE  INTERRELATION  OF  THE  FACTORS  OF  PRODUCTION     .     .  153 

X.  ECONOMIZING  LABOR  BY  THE  DIVISION  OF  LABOR    .     .     .     .  166 

XI.  ECONOMIZING  LABOR  BY  THE  USE  OF  POWER 180 

XII.  ECONOMIZING  LABOR  BY  THE  USE  OF  CAPITAL. 189 

XIII.  THE  RELATION  OF  THRIFT  TO  NATION  BUILDING    ....  203 

XIV.  FORMS  OF  BUSINESS  ORGANIZATION 213 

XV.  ECONOMICAL  USE  OF  LABOR  ON  LAND 226 

XVI.  ECONOMIZING  LAND 241 

XVII.  THE  BALANCING  OF  THE  FACTORS  OF  PRODUCTION    ....  256 

PART  III.     THE  PRODUCTIVE  INDUSTRIES  • 

XVIII.  THE  EXTRACTIVE  INDUSTRIES 267 

XIX.  THE  GENETIC  INDUSTRIES 278 

XX.  THE  MANUFACTURING  INDUSTRIES 290 

XXI.  TRANSPORTATION 303 

XXII.  MERCHANDISING 315 

XXIII.  PERSONAL  AND  PROFESSIONAL  SERVICES 324 

PART  IV.     EXCHANGE 

XXIV.  WHAT  is  VALUE? 335 

XXV.  WHAT  DETERMINES  THE  VALUE  OF  A  THING    .....  343 

XXVI.  SCARCITY 354 

v 


vi  PRINCIPLES  OF  NATIONAL  ECONOMY 

CHAPTER  PAGE 

XXVII.  MONEY 364 

XXVIII.  BANKING       394 

XXIX.  MARKETING 416 

XXX.  ECONOMIC  CRISES 427 

XXXI.  FREE  TRADE 443 

XXXII.  PROTECTIONISM 453 

PART  V.     DISTRIBUTION 

XXXIII.  THE  LAW  OF  VARIABLE  PROPORTIONS 471 

XXXIV.  THE  PROBLEM  OF  DISTRIBUTION 484 

XXXV.  WHAT  DETERMINES  THE  RATE  OF  WAGES  ? 494  • 

XXXVI.  THE  ORGANIZATION  OF  LABORERS 506 

XXXVII.  THE  RENT  OF  LAND 515 

XXXVIII.  THE  DESIRABILITY  OF  CAPITAL  AND  ITS  RELATION  TO 

INTEREST  . 526 

XXXIX.  THE  COST  OF  CAPITAL  AND  ITS  RELATION  TO  INTEREST    .  537 

XL.  PROFITS 551 

PART  VI.     CONSUMPTION 

XLI.  MEANING  AND  IMPORTANCE  OF  CONSUMPTION   ....  565 

XLII.  RATIONAL  CONSUMPTION 572 

XLIII.  LUXURY 584 

XLIV.  THE  CONTROL  OF  CONSUMPTION 598 

XLV.  THE  BATTLE  OF  THE  STANDARDS 608 

PART  VII.     PUBLIC  FINANCE 

XLVI.  TAXATION 619 

XLVII.  THE  SHIFTING  OF  TAXES 630 

XLVIII.  THE  MINIMUM  SACRIFICE  THEORY  OF  TAXATION  .     .     .  645 

XLIX.  THE  FINANCING  OF  A  WAR 66 1 

PART  VIII.     REFORM 

L.  LABOR  PROGRAMS 679 

LI.  SOCIALISM 697 

LII.  COMMUNISM 713 

LIII.  ANARCHISM 723 

LIV.  THE  SINGLE  TAX 731 

LV.  THE  LIMITS  OF  STATE  INTERFERENCE 740 

LVI.  CONSTRUCTIVE  LIBERALISM 750 

INDEX 769 


PART  I.  THE  FACTORS  OF  NATIONAL 
PROSPERITY 


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CHAPTER  I 

WHAT  MAKES  A  NATION  PROSPEROUS 

Why  the  study  of  economics  is  important.  Economics  would 
have  little  interest  for  the  serious  student  if  it  did  not  throw 
light  upon  the  conditions  of  national  prosperity  and  the  meth- 
ods of  promoting  it.  National  prosperity  is  generally  under- 
stood to  depend  largely,  if  not  mainly,  upon  business  in  its 
widest  sense.  The  student  is  sometimes  tempted,  therefore,  to 
begin  the  study  of  economics  with  an  examination  of  the 
peculiarities  of  some  of  the  large  business  establishments  and 
business  methods  of  the  present  day.  These,  however,  are 
highly  complex  affairs,  besides  being  the  result  of  a  long  process 
of  development  from  simpler  beginnings.  There  is  also  a  temp- 
tation to  begin  with  a  historical  study  of  these  simpler  be- 
ginnings, but,  because  of  lack  of  evidence,  it  is  much  harder 
to  find  out  what  business  was  like  a  few  centuries  ago  than 
to  find  out  what  it  is  like  today.  The  way  to  begin  the  study 
of  economics  is  to  analyze  the  business  of  getting  a  living  and 
reduce  it  to  its  simplest  elements.  In  this  way  we  shall  find 
what  elements  all  business — large  and  small,  primitive  and 
modern — have  in  common  before  undertaking  the  study  of 
the  special  peculiarities  of  different  kinds  of  business. 

The  primary  purpose  of  the  business  man,  as  well  as  of  all 
those  who  work  with  or  for  him,  and  others  who  work  inde- 
pendently, is  to  increase  his  own  prosperity.  Under  a  properly 
organized  industrial  system,  however,  no  one  can  increase  his 
own  prosperity  except  by  some  method  that  tends  also  to  in- 
crease the  prosperity  of  the  whole  nation.  If  there  is  a  single 
case  where  this  is  not  true  (that  is,  if  there  is  a  case  in  which 
anyone  can  prosper  by  any  method  or  practice  that  does  not 


4  PRINCIPLES  OF  NATIONAL  ECONOMY 

add  or  tend  to  add  something  to  the  prosperity  of  the  whole 
country)  there  is  an  obvious  defect  in  the  laws  or  the  organiza- 
tion of  industry.  This  defect  must  be  corrected  if  the  nation 
is  to  attain  its  highest  prosperity.  The  more  such  defects  there 
are,  the  less  the  nation  can  prosper;  and  the  fewer  there  are, 
the  more  it  can  prosper.  Before  we  are  in  a  position  to  correct 
such  defects  or  even  to  know  whether  they  exist  or  not  we 
must  have  a  pretty  clear  understanding  of  the  conditions  of 
national  prosperity  and  the  things  which  promote  or  hinder  it. 

Ways  of  getting  wealth.  The  prosperity  of  a  nation,  like  that 
of  an  individual,  depends,  in  the  most  general  sense,  upon  how 
many  useful  things  and  services  it  can  manage  to  get.  To  have 
little  and  be  satisfied  with  little  may  bring  contentment,  and 
contentment  may  be  as  desirable  as  riches  or  wealth,  but  it  is 
not  riches  nor  wealth.  A  peaceful  nation  may  get  those  things 
that  are  called  wealth  (i)  by  finding  and  appropriating  them, 
(2 )  by  making  or  producing  them,  or  (3)  it  may  get  them  from 
other  nations  in  peaceful  and  voluntary  exchange,  provided  it 
can  find  or  produce  within  its  own  borders  things  that  can  be 
given  in  exchange. 

How  many  useful  things  it  may  find  within  its  own  borders 
will  depend  partly  upon  how  rich  its  land  is  in  what  are  called 
natural  resources — such  as  soil,  minerals,  forests,  water  power, 
grass,  and  a  multitude  of  other  things — and  partly  upon  how 
active  and  intelligent  its  people  are  in  searching  for  these  things. 
How  many  useful  things  it  can  make  will  depend  mainly  upon 
how  active,  intelligent,  and  skillful  its  people  are  in  all  the  arts 
of  production  and  how  thrifty  and  enterprising  they  are  in  de- 
signing, buying,  and  utilizing  tools  and  other  instruments  of 
production.  How  many  things  it  can  get  from  other  nations 
will  depend  primarily  upon  how  many  things  it  can  find  and 
produce  to  give  in  exchange,  how  favorably  it  is  situated 
geographically  for  carrying  on  trade  with  other  nations,  and 
partly  also  upon  how  wise  and  enterprising  its  people  are  in 
learning  the  needs  and  desires  of  other  nations  and  in  adopting 
sound  methods  of  carrying  on  international  exchanges. 


WHAT  MAKES  A  NATION  PROSPEROUS  5 

The  problem  of  national  prosperity  is,  however,  by  no  means 
so  simple  as  it  may  seem  from  this  general  way  of  stating  it. 
It  is  infinitely  complicated,  so  much  so  that  when  the  student 
begins  to  study  it  he  is  in  danger  of  being  bewildered  by  a  vast 
number  of  details.  There  are  certain  general  principles  which 
help  to  avoid  this  bewilderment.  It  is  necessary,  therefore,  to 
begin  at  the  beginning  and  study  some  of  these  principles. 

Economy.  It  is  generally  understood  that  economy  has 
something  to  do  with  prosperity ;  but  what  is  economy,  and 
what  does  it  mean  to  economize  ?  In  its  original  sense  to  econ- 
omize meant  to  manage  a  household.  The  word  "economics" 
is  derived  from  two  Greek  words,  oko?,  "a  house,"  and  ve/jLw, 
"  manage."  Nowadays  the  study  of  the  management  of  a 
national  household  is  not  inappropriately  called  national  econ- 
omy or,  more  generally,  political  economy.  Its  purpose  is  to 
find  the  answer  to  the  question  at  the  head  of  this  chapter — 
What  makes  a  nation  prosperous  ?  It  appears,  therefore,  that 
the  words  "economy,"  "economics,"  and  "economize,"  as  they 
are  understood  today,  have  a  wider  meaning  than  the  manage- 
ment of  a  private  household. 

What  it  means  to  economize.  In  its  simplest  sense  to  econo- 
mize is  to  choose  among  several  different  things  which  one 
would  like  to  have,  giving  up  the  things  for  which  one  cares  less 
in  order  to  have  those  for  which  one  cares  more.  Necessity 
forces  this  kind  of  choosing  not  only  upon  individuals  but  also 
upon  communities  and  nations. 

This  choosing  of  what  one  will  have  takes  on  many  and  vari- 
ous forms  and  takes  place  many  times  every  day  in  the  life  of 
every  normal  person.  One  may  have  to  choose  between  play 
and  work  or  between  different  kinds  of  work,  different  kinds  of 
play,  or  different  objects  which  one  might  purchase  with  one's 
limited  money  or  purchasing  power.  The  problem  is  always 
how  to  use  one's  time,  one's  working  power,  or  one's  wealth  in 
such  a  way  as  to  accomplish  the  most  in  the  promotion  of  one's 
interest  or  the  fulfillment  of  one's  hopes  and  purposes.  This 
is  a  problem,  however,  not  for  the  individual  alone  but  for  the 


6  PRINCIPLES  OF  NATIONAL  ECONOMY 

community,  the  nation,  and  the  world  at  large.  The  community 
and  the  nation,  like  the  individual,  have  common  interests 
which  can  be  promoted  only  by  common  effort.  How  to  use 
the  energy  of  the  community  and  of  the  nation  economically 
(that  is,  in  such  a  way  as  to  accomplish  the  largest  and  best 
possible  results)  is  a  problem  of  the  greatest  possible  impor- 
tance. In  a  democracy  especially  it  is  fully  as  important  that 
the  citizen  should  understand  how  the  community  and  the 
nation  may  economize  their  energies  and  achieve  the  utmost 
in  the  way  of  civilization  and  well-being  as  it  is  that  he  should 
understand  how  he  may  economize  his  own  individual  energy 
and  accomplish  the  utmost  in  the  promotion  of  his  own  interest 
and  the  fulfillment  of  his  own  hopes.  Moreover,  the  former  is 
a  vastly  greater  and  more  difficult  problem  than  the  latter. 
It  will  require  a  broad,  careful,  and  systematic  study  of  eco- 
nomic principles  instead  of  a  narrow,  piecemeal,  haphazard 
study  of  individual  problems  in  economy. 

When  you  are  asked  to  do  a  certain  thing  and  you  reply  that 
you  have  not  time,  you  are  sometimes  merely  trying  to  be  polite. 
You  may  really  mean  that  there  is  something  else  which  you 
would  rather  be  doing  with  your  time  or  which  you  feel  to  be 
more  important  than  the  thing  you  are  asked  to  do.  In  other 
words,  you  have  not  time  and  energy  enough  to  do  everything 
you  would  like  to  do  or  that  others  would  like  to  have  you  do. 
You  must  leave  many  things  undone,  and  you  must,  therefore, 
choose  rather  carefully  the  few  things  that  you  think  most  im- 
portant or  that  would  cause  you  the  most  inconvenience  or  pain 
if  left  undone.  In  order  that  you  may  do  these  few  and  im- 
portant things  you  must  refuse  to  do  anything  else  that  would 
interfere.  That  is  what  it  means  to  economize  time  and  energy. 
It  is  choosing  to  do  the  more  important  things,  leaving  the  less 
important  things  undone.  Economizing  in  the  use  of  money  is 
only  one  special  form  of  economizing  time  and  energy,  since 
money  represents  the  products  of  time  and  energy. 

Why  we  have  to  economize.  In  saying  that  you  do  not  have 
time  to  do  a  certain  thing  you  are  stating  one  of  the  most  funda- 


WHAT  MAKES  A  NATION  PROSPEROUS       7 

mental  facts  of  life ;  namely,  the  great  and  ever-present  fact  of 
scarcity.  It  is  this  fact  which  compels  us  to  economize,  which 
compels  us  to  make  our  limited  fund  of  energy  and  our  limited 
time  go  as  far  as  they  will.  To  waste  time  or  energy  is  to  fail 
to  supply  ourselves  with  some  of  the  things  we  want.  To  waste 
things  that  have  already  been  produced  is  no  worse  than  to 
waste  the  time  and  energy  that  might  have  produced  more  of 
the  same  things. 

Wasting  time  and  energy  does  not  necessarily  mean  remain- 
ing idle,  though  it  may  mean  that.  It  may  mean  also  the  doing 
of  less  important  things  when  there  are  more  important  things 
to  be  done.  If  one  had  unlimited  time  and  energy,  or  if  one  had 
the  time  and  energy  necessary  to  do  everything  one  would  like 
to  do,  so  that  the  doing  of  one  thing  never  prevented  the  doing 
of  anything  else  worth  doing,  economy  would  be  unnecessary. 
If  that  were  true,  human  life  and  human  history  would  be  very 
different  from  anything  we  now  know,  and  this  world  would  be 
so  unlike  the  present  world  that  none  of  us  would  recognize  it. 

By  the  use  of  time  and  energy  we  find  or  produce  goods  and 
commodities ;  that  is,  the  material  things  which  are  the  means 
of  satisfying  our  desires.  Therefore,  when  we  say  that  we  can- 
not afford  a  certain  article  we  mean  very  much  the  same  thing, 
fundamentally,  as  when  we  say  that  we  have  not  time  to  do  a 
certain  thing.  In  both  cases  we  are  merely  stating  the  great 
fact  that  it  is  necessary  to  economize,  to  choose  what  we  will 
do  with  our  limited  energy  or  our  limited  money  to  the  exclu- 
sion of  other  things.  The  fact  that  time  and  energy  are  in- 
sufficient to  enable  us  to  do  everything  that  we  might  like  to  do 
makes  it  certain  that  we  cannot  produce  everything  that,  we 
should  like  to  have  and  that,  if  we  could,  we  should  not  have 
time  to  do  something  else.  If  we  were  to  work  all  the  time,  we 
should  have  no  time  to  play  ;  and  everybody  likes  to  play — that 
is,  everybody  worth  mentioning.  We  must,  therefore,  choose 
whether  to  deprive  ourselves  of  the  opportunity  to  play  in  order 
to  get  certain  goods  that  we  want,  or  to  reduce  somewhat  the 
number  of  goods  we  consume  in  order  to  have  more  time  to 


8  PRINCIPLES  OF  NATIONAL  ECONOMY 

play.  Again,  if  one  works  too  long  on  one  kind  of  goods  one 
has  less  time  and  energy  left  to  produce  others.  At  every  step 
in  the  life  of  every  normal  human  being,  therefore,  he  is  con- 
fronted with  some  problem  in  economy. 

As  already  stated,  the  necessity  for  economy  grows  out  of  the 
scarcity  of  something  or  other, — either  the  goods  which  are 
necessary  to  the  satisfaction  of  our  desires,  or  the  time  and 
energy  necessary  to  produce  those  goods.  Find  an  individual 
who  experiences  no  lack  or  scarcity  of  anything  and  I  will  show 
you  an  individual  who  has  no  need  for  economy ;  but  you  will 
look  a  long  time  before  you  find  him. 

Getting  and  spending.  In  the  practical,  everyday  life  of  the 
average  person  problems  of  economy  are  mainly  focused  on  the 
problems  of  getting  and  spending, — of  income  and  expenditure, 
or  of  business  and  the  household.  If  one's  income  is  less  than 
one  would  like  to  have  it,  it  means  that  one's  desires  run  beyond 
one's  income.  Such  an  individual,  therefore,  tries,  first,  to  in- 
crease his  income  and,  second,  to  get  as  much  good  out  of  it  as 
he  can :  that  is,  to  spend  it  as  wisely  as  he  knows  how.  This 
is  true  not  only  of  every  individual  and  every  family  but  also 
of  every  organization,  even  the  state  itself,  and  it  is  even  true 
of  all  the  people  as  distinct  from  their  government.  The  greater 
part  of  the  time  and  energy  of  the  people  in  this  world  is  spent 
on  these  matters,  but  it  is  spent  in  a  great  variety  of  ways. 

A  glance  at  the  diagram  at  the  beginning  of  this  chapter  will 
give  one  a  general  idea  of  all  the  forms  in  which  the  problem 
of  income  and  expenditure  presents  itself.  The  reader  will  get, 
at  the  same  time,  an  idea  of  the  principal  branches  of  the  great 
science  of  economics,  for  economics  is,  in  one  aspect,  simply  the 
study  of  the  problem  of  income  and  expenditure,  both  of  which 
are  fundamentally  problems  in  economy.  In  order  to  increase 
one's  income  one  must  economize  one's  time  and  working 
energy.  In  order  to  make  one's  income  go  as  far  as  possible 
one  must  economize  it,  buying  only  the  most  important  things 
and  making  them  go  as  far  as  they  can  be  made  to  go  in  the 
satisfaction  of  one's  wants.  In  brief,  economy  of  goods  con- 


WHAT  MAKES  A  NATION  PROSPEROUS  9 

sists  in  trying  to  make  things  that  are  scarce  go  as  far  and 
accomplish  as  much  as  possible. 

Economics  and  household  management.  It  was  stated  above 
that  historically  economics  meant  the  management  of  a  house- 
hold and  that  when  the  word  was  first  used  a  household  was  a 
simple,  self-sufficing  household.  In  such  a  household  the  prob- 
lems of  getting  and  spending,  of  income  and  expenditure,  of 
business  and  home  life,  were  not  very  distinct.  The  income  was 
made  up  of  the  products  of  the  farm  and  not  of  the  money  for 
which  those  products  could  be  sold,  because  they  were  not  sold, 
as  a  rule.  There  was  practically  no  expenditure  of  money  ;  but 
the  household  used  the  things  that  were  produced  within  it, 
since  the  farm  was  considered  a  part  of  the  household.  In 
this  simple  household,  however,  the  fundamental  problems  of 
economy  had  to  be  worked  out  very  much  as  they  are  in  the 
modern  business  or  the  modern  household.  The  working  power 
of  the  household  had  to  be  very  carefully  economized.  The 
economizing  of  the  working  power  consisted,  first,  in  keeping 
it  active  instead  of  allowing  it  to  go  to  waste  in  idleness  ;  second, 
in  directing  it  efficiently,  so  that  as  little  effort  as  possible  should 
be  wasted  by  lost  motion,  poor  tools,  or  inefficient  and  hap- 
hazard ways  of  doing  things ;  third,  and  quite  as  important  as 
either  of  the  others,  in  directing  it  wisely,  or  directing  it  toward 
the  production  of  things  of  vital  importance  to  the  well-being  of 
the  household  and  not  wasting  it  in  the  production  of  trivialities. 

Household  management  and  national  economy.  In  some  re- 
spects the  problems  of  the  self-sufficing  household  more  nearly 
resemble  those  of  the  modern  nation  than  those  of  the  modern 
business  or  the  modern  household.  The  prosperity  of  the  na- 
tion requires  the  same  forms  of  economy  in  production.  The 
nation  that  wastes  its  time  and  working  energy  in  idleness  or 
leisure  will,  of  course,  fail  to  achieve  its  maximum  prosperity. 
Likewise  the  nation  whose  people  do  things  in  inefficient  ways, 
by  slipshod  methods,  or  with  inadequate  tools  and  equipment 
will  fail  to  become  as  prosperous  as  it  might  become.  In  these 
two  respects  the  private  business  of  today  and  the  nation's  busi- 


io  PRINCIPLES  OF  NATIONAL  ECONOMY 

ness  are  much  alike.  In  the  third  form  of  economy,  however, 
there  is  some  difference;  a  private  business  may  prosper  by 
producing  frills  and  luxuries,  sometimes  even  by  pandering  to 
vice.  This  could  not  be  true  of  a  self-sufficing  nation  any 
more  than  of  a  self-sufficing  household  of  the  primitive  type. 
It  is  quite  as  important  that  the  national  energy  be  devoted  to 
the  production  of  important  rather  than  of  unimportant  things 
as  that  the  nation  should  be  industrious  or  efficient  in  its 
methods  of  production.  In  other  words,  it  is  no  greater  waste 
of  the  nation's  resources  to  have  them  remain  idle  than  to  have 
them  misdirected  or  employed,  however  efficiently,  in  the  pro- 
duction of  useless  things.  Again,  it  is  no  more  wasteful  of  the 
nation's  resources  to  have  its  labor  used  very  inefficiently  by 
slipshod  methods  and  poor  tools  than  to  have  it  engaged  by  the 
most  efficient  methods  and  the  best  possible  tools  in  the  produc- 
tion of  useless  or  harmful  commodities. 

In  the  primitive,  self-sufficing  household  there  was  very  little 
buying  and  selling  within  the  household.  In  the  modern  self- 
sufficing  nation  there  is  a  vast  amount  of  buying  and  selling 
among  its  own  citizens.  The  subject  of  exchange,  therefore, 
forms  a  most  important  part  of  the  economy  of  the  nation  but 
a  negligible  part  of  the  economy  of  a  self-sufficing  household. 
Again,  the  problem  of  the  sharing  of  the  income  among  the 
members  of  the  household  may  have  been  a  matter  of  some  im- 
portance, but  it  could  not  have  been  nearly  so  important  as  it 
has  become  in  the  modern  nation  with  its  great  diversities  of  in- 
terests and  its  wide  separation  of  industrial  classes  and  groups. 

Another  important  change  has  taken  place  in  the  household 
itself :  whereas  in  the  primitive,  self-sufficing  household  the 
problems  of  getting  and  utilizing  were  very  closely  related,  in 
the  modern  household  they  are  very  widely  separated.  In  recent 
times,  especially  in  our  cities,  what  is  called  business  has  come 
to  be  regarded  as  the  source  of  income,  whereas  the  home  is  the 
place  where  the  income  is  utilized.  Business  life  and  home  life 
are  so  distinct  as  frequently  to  be  regarded  as  different  and  al- 
most unrelated  fields  of  action.  This  separation  of  business 


WHAT  MAKES  A  NATION  PROSPEROUS      n 

from  the  home  has  given  rise  to  a  division  of  the  field  of  private 
economics  into  two  distinct  parts,  one  of  which  is  known  as 
business  economics,  the  other  as  home  economics.  That  these 
two  parts,  which  the  Greeks  regarded  as  the  same  subject,  are 
now  so  widely  separated  shows  that  we  have  gone  a  long  way 
from  the  primitive  condition  in  which  business  and  home  life 
were  united,  and  are  approaching,  if  we  have  not  already 
arrived,  at  a  condition  in  which  they  are  completely  divorced. 
Whether  this  is,  on  the  whole,  a  good  tendency  or  only  partly 
good  and  partly  bad,  is  a  very  interesting  and  difficult  problem. 
Public  income  and  expenditure.  But  the  problem  of  income 
and  expenditure  is  a  serious  question  for  the  public  as  a  whole 
as  well  as  for  the  private  citizen.  The  state  gets  its  income 
from  different  sources  and  by  different  methods  from  those 
pursued  by  the  individual,  but  income  is  as  necessary  to  a  state 
as  to  a  citizen.  In  order  that  its  limited  income  may  go  as  far 
as  possible  and  accomplish  the  greatest  possible  good  the  ques- 
tion of  public  expenditure  must  be  studied  with  the  greatest 
care.  It  is  scarcity  in  this  case,  as  well  as  in  the  case  of  the 
individual,  which  makes  economy  necessary.  If  we  could  im- 
agine a  state  with  an  unlimited  income, — which  we  cannot, — 
so  that  when  it  spent  money  for  one  purpose  it  was  not  obliged 
to  refrain  from  spending  money  for  any  other  purpose,  there 
would,  of  course,  be  no  occasion  for  public  economy.  Xeno- 
phon,  who  wrote  our  oldest  treatise  under  the  title  of  "Eco- 
nomics," wrote  also  a  treatise  on  "The  Revenues  of  Athens." 
In  the  former  work  he  was  well  within  the  field  of  private  eco- 
nomics, but  in  the  latter  he  had  got  well  over  into  the  field  of 
public  economics.  This  branch  of  public  economics,  or  political 
economy  (that  is,  the  branch  which  deals  with  the  revenues  and 
expenditures  of  the  state,  or  with  what  has  been  called  the 
housekeeping  of  the  state),  is  commonly  called  public  finance. 
It  will  readily  be  seen  that  there  is  a  close  resemblance  between 
public  finance,  which  deals  with  the  income  and  expenditure  of 
the  government,  and  private  economics,  which  deals  with  the 
income  and  expenditure  of  the  private  family. 


12  PRINCIPLES  OF  NATIONAL  ECONOMY 

Social  well-being.  But  there  is  another  branch  of  public 
economics  which  is  broader  than  public  finance ;  that  is  the 
branch  which  deals  with  the  general  problem  of  social  wealth 
or  well-being.  This  branch  deals  neither  with  the  income  and 
expenditure  of  the  individual  family  as  such  nor  with  those  of 
the  government  as  such.  It  deals  rather  with  the  income  and 
expenditure  of  the  people  as  a  whole.  This  is  called  social 
economy  or  social  economics.  It  is  the  most  important  study 
for  the  real  statesman  or  nation  builder.  Since  in  a  democracy 
everyone  is  a  nation  builder  (in  a  small  way  at  least),  in  that 
he  helps  to  determine  the  policy  of  the  nation,  it  is  of  the 
greatest  possible  importance  that  everyone  should  study  the 
problems  of  social  economy  as  well  as  those  of  public  finance 
and  private  economics. 

The  management  of  the  king's  household.  A  good  illustration 
of  the  importance  of  this  subject  is  found  in  the  studies  of  a 
group  of  scholars  who  some  hundreds  of  years  ago  were  study- 
ing the  problem  of  providing  for  the  king's  household.  These 
were  the  finance  ministers  of  certain  kings  of  European  coun- 
tries. They  are  now  sometimes  called  the  cameralists.  Having 
charge  of  the  affairs  of  the  king's  household,  they  were,  in  a 
sense,  studying  private  economics ;  but  since  the  king  was  a 
public  functionary,  deriving  much  of  his  revenue  from  taxation 
and  other  public  sources  and  performing  many  of  the  acts  of 
government,  these  finance  ministers  were,  in  another  sense, 
studying  public  economics.  At  any  rate,  they  were  severely 
put  to  it  to  find  revenue  enough  to  pay  the  expenses  of  the  royal 
household  or  to  keep  the  expenses  within  the  royal  revenues; 
that  is,  to  balance  income  and  expenditure.  These  were  prob- 
lems in  economy.  How  to  get  as  large  an  income  as  possible 
with  the  limited  energy  at  their  disposal,  and  how  to  expend 
that  income  so  as  to  add  the  maximum  to  the  resources  of  the 
king's  household,  were  very  serious  problems. 

The  social  income.  The  more  they  studied  this  problem  the 
more  clearly  they  saw  that  in  order  to  increase  the  royal  income 
the  people  over  whom  the  king  ruled  must  be  made  prosperous ; 


WHAT  MAKES  A  NATION  PROSPEROUS  13 

that  is,  the  social  income  also  must  be  increased.  "  Poor  people, 
poor  king"  came  to  be  an  axiom  in  public  finance.  Therefore 
attention  was  given  to  the  problem  of  increasing  the  social 
income  or  of  promoting  the  prosperity  of  all  the  people.  Later 
writers  have  given  their  chief  attention  to  this  part  of  the 
problem.  In  the  outline  at  the  beginning  of  this  chapter  this 
is  called  social  economy. 

Exchange.  In  one  sense,  as  already  pointed  out,  the  social 
income  is  the  annual  production  of  the  nation.  So  there  was  a 
tendency  at  first  to  give  chief  attention  to  the  subject  of  pro- 
duction; but  it  was  soon  discovered  that  in  social  economy 
exchange  was  an  important  factor.  In  studying  the  internal 
economy  of  an  individual  household,  whether  a  private  or  a 
royal  household,  exchange  among  the  members  could  be  left 
out  of  account ;  but  in  studying  the  internal  economy  of  a  whole 
nation  it  could  not  be  left  out  of  account,  for  the  obvious  rea- 
son that  the  citizens  of  the  nation  did  a  great  deal  of  exchanging 
among  themselves.  This  is  particularly  true  of  the  modern 
nations.  Buying  and  selling  have  come  to  be  so  large  a  part  of 
the  economic  life  of  the  people  that  for  a  long  time  it  seemed 
to  many  students  to  be  the  most  important  aspect  of  economic 
life.  So  there  came  a  time  when  the  chief  emphasis  was  laid 
upon  exchange  rather  than  upon  production.  Indeed,  it  was 
assumed  for  a  time  that  production  would  almost  take  care  of 
itself ;  that  is,  each  individual  would  look  after  his  own  part 
in  it  if  only  the  government  would  provide  him  safe  and  open 
markets  and  a  convenient  medium  of  exchange  in  the  form  of 
money  and  sound  banking  facilities. 

Distribution  of  social  income.  Still  later  another  problem  was 
discovered  to  be  of  equal  or  greater  importance.  Like  the 
problem  of  exchange  this  was  one  which  also  could  be  ignored 
in  the  study  of  private  economics.  It  is  the  problem  of  the 
division  of  the  products  of  industry  among  the  workers.  When 
a  large  number  of  people  take  part  in  the  production  of  a  given 
commodity,  say  shoes,  the  question  as  to  how  much  of  the  value 
of  the  shoes  shall  go  to  each  person  or  group  of  persons  is  of  the 


14  PRINCIPLES  OF  NATIONAL  ECONOMY 

utmost  importance  in  social  economy.  The  farmer,  the  miller, 
and  the  baker,  as  well  as  the  carrier,  have  all  had  something 
to  do  with  the  production  of  a  loaf  of  bread.  It  is  very  im- 
portant to  know  how  much  of  the  value  of  the  bread  goes  to 
each  of  those  who  have  had  a  part  in  its  production.  This  is 
called  the  problem  of  distribution ;  as  you  will  see,  it  is  some- 
what different  from  the  problem  of  exchange,  though  very 
closely  related  to  it.  Such  questions  as  the  wages  of  different 
classes  of  laborers,  the  rent  of  land,  the  interest  on  capital,  the 
profits  of  enterprise,  are  parts  of  the  general  problem  of  dis- 
tribution. During  the  last  fifty  years,  it  is  fair  to  say,  more 
emphasis  has  been  laid  upon  the  subject  of  distribution  than 
upon  either  production  or  exchange. 

The  utilization  of  the  social  income.  While  the  consumption 
of  the  people  has  been  recognized  as  the  utilization  of  the  social 
income,  and  therefore  as  a  thing  important  in  itself,  yet  students 
have  almost  ignored  it  as  a  branch  of  the  science  of  economics. 
One  reason  has  doubtless  been  the  feeling  that  every  individual 
would  better  be  left  to  consume  his  income  as  he  liked,  whether 
he  did  it  wisely  or  foolishly,  beneficially  or  harmfully.  Attempts 
to  control  or  direct  his  consumption  have  been  called  sumptuary 
laws.  By  pronouncing  these  words  with  a  wry  face  such  at- 
tempts may  be  discredited,  that  is,  for  a  time.  Meanwhile, 
however,  every  progressive  community  has  gone  right  on  passing 
sumptuary  laws,  in  one  form  or  another,  sometimes  to  the  great 
advantage  of  the  people,  sometimes  to  their  disadvantage.  Stu- 
dents are,  therefore,  becoming  convinced  that  the  consumption 
of  wealth  merits  a  great  deal  of  study,  that  it  is  going  to  be  con- 
trolled and  directed  by  the  state  whether  we  like  it  or  not,  and 
that  whether  it  is  controlled  and  directed  wisely  or  unwisely 
will  depend  upon  how  carefully  and  intelligently  it  is  studied. 
In  fact,  a  few  are  already  beginning  to  discover  that  consump- 
tion is  more  important  than  production,  exchange,  or  distribu- 
tion— possibly  more  important  than  all  three  combined. 


CHAPTER  II 
ECONOMIC  DESIRES 

Desires  as  motives.  The  purpose  of  economy  is  to  enable  us 
to  secure  the  fullest  possible  satisfaction  of  our  desires.  The 
more  desires  we  can  satisfy,  or  the  fewer  we  leave  unsatis- 
fied, the  more  prosperous  we  become.  These  economic  desires, 
moreover,  furnish  the  constant  motives  to  economic  action, 
though  they  are  supplemented  by  instincts,  impulses,  and  other 
motives  not  so  well  understood. 

The  need  of  an  adequate  motive.  Whenever  a  new  enterprise 
is  proposed,  whether  in  the  field  of  business,  politics,  education, 
or  philanthropy,  one  of  the  first  questions  that  ought  to  be 
asked,  after  ascertaining  that  the  purpose  of  the  enterprise  is 
a  worthy  one,  is,  Where  is  the  motive  ?  or,  Who  has  a  sufficient 
motive  for  carrying  it  on?  Many  an  excellent  plan — excellent 
in  other  respects — has  failed  merely  because  no  one  had  a 
sufficient  motive  for  spending  the  vast  amount  of  time  and 
energy  necessary  to  make  it  succeed.  New  enterprises  have  to 
be  nursed  along  and  coaxed  into  success ;  and  no  one  will  take 
the  necessary  pains  unless  he  has  a  powerful  and  persistent 
motive.  Sudden  enthusiasms  are  soon  spent,  even  the  pleasure 
of  doing  something  new  wears  out  when  the  enterprise  ceases  to 
be  new.  Some  motive  is  needed  that  does  not  wear  out  but 
renews  itself  every  day.  Physical  wants  have  this  quality,  be- 
cause the  human  body  requires  constant  supplies  of  goods. 

Transitory  motives.  Many  of  our  impulsive  and  instinctive 
actions  are  desultory  because  as  motives  they  are  easily  satisfied 
and  are  not  self-renewing.  Every  spring,  about  the  time  the 
frost  is  out  of  the  ground,  nearly  every  man  feels  an  impulse  to 
dig.  It  seems  as  natural  for  him  to  dig  at  that  time  of  the  year 
as  for  the  sap  to  run,  the  crocuses  to  push  upward,  geese  to  fly 

15 


1 6  PRINCIPLES  OF  NATIONAL  ECONOMY 

northward,  or  boys  to  play  marbles.  But  this  impulse  is  soon 
satisfied;  and,  unless  some  other  and  more  persistent  motive 
begins  to  function,  every  man  will  begin  soon  to  neglect  the 
garden  so  heroically  begun.  Many  other  impulses  or  instincts 
are  about  as  ineffective  as  this  one  as  motives  for  the  con- 
tinuous toil  and  taking  of  pains  that  are  necessary  in  modern 
production. 

Kinds  of  desires.  There  are  at  least  three  kinds  of  self- 
renewing  desires  that  play  an  important  part  in  our  economic 
life  or  that  supply  us  with  motives  for  economic  action — the 
desire  for  action,  the  desire  for  esteem,  and  the  desire  for  mate- 
rial goods.  All  three  show  themselves  very  early  in  the  lives  of 
children  and  remain  with  them  as  long  as  they  are  in  the  land 
of  the  living.  They  function  continuously  and  persistently  as 
motives ;  they  do  not  wear  out,  but  drive  us  all  the  time.  They 
may  seem  like  selfish  desires ;  but  even  benevolence  is  likely  to 
take  the  form  of  desiring  one  or  more  of  these  things  for  others. 
The  sympathetic  person  who  enters  into  the  thoughts  and  feel- 
ings of  others,  realizing  that  they  desire  these  three  things,  is 
very  likely  to  desire  that  they  should  have  them. 

Desire  for  action.  The  desire  for  action  results  in  play ;  but 
there  is  an  element  of  play  in  many  kinds  of  work.  In  general, 
play  may  be  defined  as  any  action  which  is  itself  so  pleasur- 
able as  to  provide  a  sufficient  motive.  Frequently,  however, 
the  desire  for  esteem  adds  to  the  strength  of  the  motive  for  play, 
especially  when  a  popular  game  furnishes  an  opportunity  for 
the  exhibition  of  prowess.  Even  the  desire  for  pecuniary  gain 
has  been  known  to  enter  in;  but  this  is  generally  considered 
bad  sportsmanship.  Work  may  be  defined  in  general  as  any 
action  which  requires  some  other  reward  than  the  pleasure  of 
the  action.  This  does  not  mean  that  there  is  no  pleasure  what- 
ever in  the  action  which  we  call  work.  It  means  simply  that 
the  play  motive  is  not  the  only  motive,  generally  not  the  chief 
motive,  and  sometimes,  in  the  case  of  disagreeable  work,  no 
motive  at  all.  Work,  like  play,  is  sometimes  done  partly  to  win 
the  esteem  of  others.  It  is  frequently  done  with  that  desire  as 


ECONOMIC  DESIRES  17 

one  of  the  subordinate  motives,  but  generally  it  is  done  for  the 
purpose  of  gaining  a  reward  in  the  form  of  material  goods. 

Desire  for  esteem.  The  desire  for  esteem  or  for  the  good 
opinion,  the  praise,  and  the  admiration  of  others  is  as  genuine 
a  motive  for  action  as  either  of  the  other  kinds  of  desire.  It  is 
in  some  cases  the  sole  motive  for  action ;  but  it  is  generally 
found  working  in  combination  with  one  or  both  of  the  others. 
As  stated  above,  it  is  sometimes  one  of  the  motives  to  play. 
Even  what  appears  to  be  the  desire  for  material  wealth  is  fre- 
quently in  part  a  desire  to  achieve  social  esteem  by  means  of 
material  possessions.  A  woman's  desire  for  finery  is  not  solely 
nor  usually  due  to  her  appreciation  of  the  things  themselves. 
It  is  generally  and  mainly  a  desire  to  be  thought  well  of.  The 
same  may  be  said  of  a  man's  desire  for  those  strange  things 
which  he  so  solemnly  wears  on  state  occasions  when  he  takes 
himself  seriously.  The  desire  to  make  an  impression  upon 
others  enters  into  his  appreciation  of  a  great  many  things 
besides  clothes.  It  is  an  element  in  his  desire  for  fine  houses, 
trains  of  servants,  costly  equipages,  and  many  other  expensive 
things  which  add  very  little  to  comfort  or  well-being. 

Desire  for  material  goods.  Even  when  the  desire  for  esteem 
seems  the  chief  desire  there  is  usually  found  a  mixture  of  the 
others.  The  politician's  desire  for  popularity  is  not  in  every 
case  free  from  the  desire  for  the  salaries  and  other  emoluments 
of  office.  Nor  is  the  actor's  desire  for  applause  always  free  from 
the  subconscious  feeling  that  popular  esteem  may  be  followed 
by  an  enlarged  income. 

Importance  of  balanced  desires.  While  it  is  possible  to  discuss 
these  three  kinds  of  desire  separately,  yet,  as  a  matter  of  fact, 
they  are  likely  to  be  mixed  in  varying  proportions  in  every 
individual  case.  It  is  probably  better  economically  that  they 
should  be  thus  mixed  and  that  no  one  kind  of  desire  should 
exclude  or  predominate  over  the  others.  When  this  happens 
we  are  likely  to  have  an  unbalanced  individual,  of  very  little 
use  to  himself  or  anybody  else.  The  one  who  cares  inordinately 
for  action,  with  very  little  regard  for  social  esteem  or  for  the 


1 8  PRINCIPLES  OF  NATIONAL  ECONOMY 

material  rewards  of  productive  labor,  is  likely  to  waste  his  life 
in  strenuous  adventure,  even  if  he  does  not  become  a  criminal. 
The  individual  who  cares  inordinately  for  the  esteem  or  admi- 
ration of  others,  with  very  little  desire  for  action  or  for  the 
material  rewards  of  productive  effort,  is  likely  to  be  vain, 
effeminate,  and  weak  even  if  he  does  not  become  a  poseur,  who 
tries  to  attract  attention  to  himself  by  striking  strange  atti- 
tudes, saying  weird  things,  or  espousing  strange  causes.  The 
individual  who  cares  inordinately  for  material  goods,  with  no 
liking  for  action  or  for  the  good  opinion  of  his  fellows,  is  likely 
to  become  hard,  grasping,  and  miserly.  Which  of  these  three 
unbalanced  individuals  is  the  most  undesirable  would  be  hard 
to  decide. 

So  far  as  the  nature  of  a  man's  desires  can  make  him  useful 
economically  it  is  probable  that  the  most  useful  man  is  the 
one  in  whom  all  these  three  kinds  of  desire  are  strongest,  pro- 
vided there  be  a  proper  balance  among  them.  The  man  who 
loves  action  intensely,  who  at  the  same  time  desires  intensely 
that  his  fellow  men  should  think  well  of  him,  and  who  has  also 
an  intense  desire  for  an  abundance  of  goods  for  himself  and  for 
those  for  whom  he  cares,  will  certainly  be  an  energetic,  neigh- 
borly, and,  so  far  as  his  physical  and  mental  powers  will  enable 
him  to  be,  a  productive  individual. 

Satiability  of  desire.  When  we  come  to  consider  desires  sep- 
arately and  to  compare  them  one  with  another,  we  find  that 
they  have  certain  things  in  common  which  are  of  the  utmost 
importance  to  the  student  of  economics.  To  begin  with,  all 
desires  are  satiable. 

Desire  in  general  may  or  may  not  be  satiable — that  is  no 
concern  of  the  economist ;  but  the  specific  desire  for  any  specific 
thing  may  be  completely  satisfied  or  satiated  if  the  thing  desired 
can  be  had  in  sufficient  abundance.  Many  desirable  things  are 
to  be  had  in  sufficient  abundance.  In  the  case  of  air,  for  ex- 
ample, though  it  is  a  vital  necessity,  yet  there  is  so  much  of  it, 
except  in  crowded,  poorly  ventilated  rooms,  that  everyone  can 
have  all  he  can  possibly  use.  Under  such  circumstances  no  one 


ECONOMIC  DESIRES  19 

has  any  desire  for  more  nor  any  motive  for  action  looking  to  an 
increase  of  the  supply.  In  a  crowded  room,  or  anywhere  else 
where  there  is  not  enough,  someone  who  desires  more  will  have 
a  motive  to  action,  even  if  the  action  consists  in  nothing  more 
than  opening  a  window. 

The  desire  for  air,  however,  does  not  differ  in  this  respect 
from  the  desire  for  anything  else.  When  it  is  fully  satisfied  or 
satiated  it  ceases  to  be  a  motive  for  action.  So  long  as  it 
is  unsatisfied  it  is  a  motive  for  action.  In  other  words,  if  there 
is  enough  of  the  object  desired  to  satisfy  everybody,  no  one  is 
likely  to  bestir  himself  to  try  to  produce  more,  even  if  he  knew 
how  to  do  so.  If  there  is  not  enough  of  anything  there  is 
a  motive  for  action  looking  to  an  increase  of  production,  and 
if  production  is  possible  an  industry  is  likely  to  come  into 
existence. 

Unsatisfied  desires  as  spurs  to  action.  Not  only  is  every  desire 
satiable,  but  we  observe  as  a  part  of  our  own  experience  and 
our  observation  of  others  that  the  more  nearly  a  desire  comes  to 
being  satisfied  the  weaker  it  becomes  and  the  weaker  the  motive 
to  action.  Conversely,  the  further  it  is  from  being  satisfied  the 
stronger  it  is  and  the  more  powerful  the  motive  to  action.  This 
is  a  physiological  fact,  which  if  anyone  cares  to  dispute  it,  he 
can  test  by  experimenting  on  himself,  or  merely  by  thinking 
about  his  own  everyday  experiences  as  they  come  to  him.  The 
hungrier  a  boy  is  for  apples,  the  more  powerful  the  temptation 
to  acquisitive  action.  In  the  process  of  consumption  the  first 
apple  is  likely  to  taste  a  little  better  than  the  second,  the  second 
than  the  third,  and  so  on,  until  eventually,  if  the  supply  of 
apples  holds  out,  he  may  reach  a  point  where  an  additional 
apple  will  add  nothing  whatever  to  his  comfort  or  pleasure. 
This  is  true  of  every  desire  in  the  whole  range  of  human 
interests. 

Care  must  be  taken,  however,  to  avoid  shifting  the  attention 
from  one  desire  to  another.  The  desire  for  wealth  in  general  is 
sometimes  said  to  be  insatiable.  Even  if  this  were  true,  as  it 
probably  is  not,  it  would  not  refute  the  proposition  that  any 


20  PRINCIPLES  OF  NATIONAL  ECONOMY 

specific  desire  is  satiable.  Wealth  is  a  collective  name  for  a 
vast  number  of  things.  As  soon  as  the  desire  for  one  thing  is 
satisfied  there  is  very  likely  to  be  something  else  which  one 
would  like  to  have,  and  so  on  almost  indefinitely.  In  other 
words,  the  attention  shifts  from  one  thing  to  another.  Never- 
theless, when  the  desire  for  one  specific  thing  is  satisfied  that 
particular  desire  no  longer  furnishes  a  motive  to  action.  The 
thing  desired  will  then  be  held  in  low  esteem,  will  have  little 
value,  and,  if  it  sells  at  all,  will  sell  at  a  low  price. 

Anticipated  future  desires.  We  must  be  careful  also  not  to 
confine  our  attention  to  the  desire  of  the  present  instant.  We 
are  creatures  endowed  with  a  certain  degree  of  foresight. 
Therefore,  the  temporary  satiation  of  a  desire  is  not  to  be  con- 
sidered as  its  complete  satiation.  After  a  good  meal  we  are 
doubtless  temporarily  satisfied  with  food;  but  that  does  not 
mean  that  we  have  no  motive  for  further  effort  to  procure  food. 
We  foresee  other  mealtimes  in  the  future  and  realize  that  unless 
we  bestir  ourselves  now  we  may  have  to  go  hungry  then.  In  this 
respect  the  desire  for  food  does  not  differ  from  the  desire  for 
anything  else.  If  we  were  to  foresee  a  set  of  circumstances  in 
which  we  should  not  have  air  enough,  we  should  be  very  active 
in  the  present  trying  to  avoid  those  circumstances  or  to  safe- 
guard our  future  supply  of  air.  In  short,  forethought  enters 
into  the  question  of  satiation  of  desire  in  the  case  of  all  crea- 
tures who  have  the  capacity  for  appreciating  future  as  well  as 
present  needs. 

Desires  are  self-centered.  Next  to  the  satiability  of  desires 
their  most  important  characteristic  is  that  they  are  self- 
centered,  though  not  necessarily  selfish ;  that  is,  we  desire  the 
good  things  of  life  for  some  people  more  than  for  other  people. 
We  usually  include  ourselves  in  the  preferred  list.  The  others 
whom  we  include  in  this  list  (that  is,  those  for  whom  we  have 
this  preference)  are  in  some  way  grouped  around  ourselves  as 
centers  of  appreciation  and  interest.  Even  the  humanitarian 
who  professes  to  care  for  mankind  above  all  nations  seems 
still  to  prefer  mankind  to  other  species.  There  are  people  who 


ECONOMIC  DESIRES  21 

have  so  deep  an  interest  in  animals  as  to  be  unwilling  to  sacrifice 
any  animal  for  the  benefit  of  mankind.  They  are  slightly  less 
self-centered  than  the  humanitarians,  but  even  they  cannot  take 
quite  the  same  interest  in  the  lower  as  in  the  higher  animals. 
In  short,  no  one  can  avoid  being  slightly  self -centered — caring 
more  for  some  animals  than  for  others,  for  certain  races  or 
nationalities  of  men  than  for  others,  or  even  for  certain  persons 
than  for  others.  Generally  it  will  be  found  that  those  species, 
nationalities,  or  persons  for  whom  we  care  most  are  in  some 
sense  nearer  to  ourselves  than  those  for  whom  we  care  least. 

This  fact  of  self-centered  interest  must  be  taken  as  one  of  the 
original,  or  primary,  facts  in  our  problem  of  nation  building. 
It  is,  therefore,  very  important  that  we  examine  it  and  see 
exactly  what  it  means. 

What  is  self-interest  ?  Our  discussion  will  center  naturally 
around  two  main  questions :  first,  What  does  it  mean  to  be  self- 
interested?  and,  second,  Is  it  a  good  or  a  bad  thing  for  each 
individual  to  be  self-interested  or  at  least  slightly  self-centered, 
as  we  shall  call  it  ?  In  discussing  the  first  of  these  questions  it 
is  not  necessary  to  go  very  far  into  that  form  of  hair-splitting 
analysis  which  considers  whether  benevolence  is  not  merely 
another  form  of  selfishness.1  It  is  sometimes  argued  by  a  cer- 
tain kind  of  sophist  that  the  benevolent  person  is  benevolent 
because  he  gets  pleasure  from  being  benevolent.  Since  it  gives 
him  pleasure,  it  is  only  a  form  of  self-gratification ;  and  since 
it  is  only  a  form  of  self-gratification,  it  is  only  another  form  of 
selfishness.  It  may  be  true,  from  a  certain  point  of  view,  that  a 
man  may  get  more  pleasure  from  the  taste  of  food  upon  the 
palates  of  his  children  than  upon  his  own.  A  sophist  might  say 
that  he  was  as  truly  selfish  as  a  man  who  got  no  pleasure 
whatever  from  the  taste  of  food  upon  any  palate  but  his  own. 
However,  no  sensible  person  would  remain  long  in  doubt  as  to 
which  would  make  the  better  father.  There  is  no  doubt  that 
the  man  who  takes  some  delight  in  the  welfare  of  his  neighbors 

1See  the  author's  "Essays  in  Social  Justice,"  p.  60.  Harvard  University 
Press,  1915. 


22  PRINCIPLES  OF  NATIONAL  ECONOMY 

and  fellow  citizens  is  a  better  neighbor  and  citizen  than  a  man 
who  takes  no  pleasure  whatever  in  such  things. 

In  trying  to  understand  what  self-interest  really  is  there  are 
two  extreme  views  to  be  avoided.  One  is  that  self-interest 
means  such  extreme  selfishness  as  to  show  no  regard  whatever 
for  the  interests  of  others ;  the  other  is  that  benevolence  means 
a  real  preference  for  other  people  as  compared  with  self.  Now 
selj-interest  simply  means  some  preference  for  self  as  compared 
with  certain  other  people ;  and  benevolence,  instead  of  meaning 
a  preference  for  other  people,  is  quite  compatible  with  some 
degree  of  preference  for  self.  There  is  probably  no  human  being 
who  has  not  some  interest  in  other  people  besides  himself ; 
neither  is  there  anyone  who  does  not  care  more  for  himself 
than  he  does  for  other  individuals  outside  a  rather  narrow 
family  or  neighborhood  circle. 

The  difference  between  a  selfish  and  a  benevolent  person. 
As  a  matter  of  fact  the  difference  between  a  selfish  and  a 
benevolent  person  is  one  of  degree.  An  extremely  selfish  per- 
son is  one  who  has  an  extreme  preference  for  self  as  compared 
with  others  and  whose  interest  in  other  people  does  not  extend 
beyond  a  rather  narrow  circle  of  relatives,  friends,  and  neigh- 
bors. An  extremely  benevolent  person  is  one  who  has  only  a 
mild  preference  for  self  as  compared  with  others,  whose  in- 
terest in  others  extends  to  a  rather  wide  circle  of  relatives, 
friends,  neighbors,  fellow  citizens,  and  many  other  human 
beings,  and  who  even  includes  some  of  the  kindly  animals  in 
the  circle  of  his  care  and  protection.  To  prefer  the  satisfac- 
tion which  the  expenditure  of  a  dollar  on  charity  gives  me  to 
the  satisfaction  which  it  would  give  me  in  the  gratification 
of  my  own  palate  does  not  mean  that  I  have  a  deeper  interest 
in  the  receiver  of  my  charity  than  I  have  in  myself.  If  I  spent 
the  dollar  upon  myself  it  might  supply  only  a  trifling  need  or 
gratify  a  mere  whim  or  caprice,  because  I  have  spent  so  many 
other  dollars  on  myself  as  to  have  supplied  all  my  principal 
needs.  But  when  it  is  spent  in  charity  it  may  supply  a  vital 
need  of  someone  else.  If  I  were  in  exactly  as  great  need  as  he 


ECONOMIC  DESIRES 


of  the  objects  which  my  last  dollar  would  purchase,  and  I  then 
gave  him  my  dollar,  that  would  show  that  I  appreciated  his 
interest  as  highly  as  my  own  or  even  more  highly  than  my  own. 
If  there  are  a  number  of  people  in  whom  I  am  so  deeply  inter- 
ested as  to  be  willing  to  sacrifice  myself  even  to  a  slight  extent, 
I  should  pass  for  a  fairly  generous  man.  But  while  I  am  writ- 
ing this  I  am  fully  conscious  of  the  fact  that  there  are  people 
in  various  parts  of  the  world  who  are  suffering  from  hunger, 
cold,  and  sickness.  Yet  I  sit  comfortably  in  my  room  instead 
of  going  out  to  find  them  and  share  my  last  dollar  with  them. 
They  are  so  far  away  in  space,  or  they  are  so  removed  from  my- 
self in  race,  language,  religion,  or  color,  that  I  cannot  cudgel  my- 
self into  caring  as  much  for  their  comfort  as  I  do  for  my  own. 
If  they  were  near  neighbors  or  near  relatives  I  should  take  a 
deep  interest  in  them.  Will  the  reader  ask  himself  if  he  is  not  in 
about  the  same  condition  ?  The  way  in  which  I  appreciate  an 
income  for  myself  more  than  I  appreciate  an  income  for  some- 
one else  may  be  illustrated  by  means  of  the  diagrams  below: 


o 


D" 


E    JE'    E'1 

Diagram  A 

A's  appreciation  of  his 

own  income 


O 


E  E' 
Diagram  B 
A's  appreciation  of  B's 


-X 


~  E 

Diagram  C 

A's  appreciation  of  C's 

income 


In  Diagram  A  let  us  measure  the  income  of  a  certain  man, 
whom  we  shall  call  A,  along  the  line  OX,  and  his  appreciation 
of,  or  interest  in,  each  dollar  of  his  income  along  the  line  OF. 
Thus,  if  his  income  is  equal  to  the  line  OE,  his  interest  in  each 
dollar  is  measured,  let  us  say,  by  the  line  DE.  But  as  his 
income  increases,  each  dollar  becomes  a  matter  of  less  conse- 
quence to  him.  He  could  spare  it  with  less  real  sacrifice,  be- 
cause, having  so  many  other  dollars,  he  can  still  supply  himself 
with  all  the  necessaries  of  life  and  some  unnecessary  things 


24  PRINCIPLES  OF  NATIONAL  ECONOMY 

besides.  In  other  words,  if  we  assume  that  his  income  increases 
from  a  quantity  measured  by  the  line  OE  to  a  quantity  meas- 
ured by  the  line  OE',  then  his  interest  in  each  dollar  will  de- 
cline from  an  intensity  measured  by  the  line  DE  to  an  intensity 
measured  by  D'E'.  Another  increase,  say  to  the  line  OE" , 
would  bring  another  fall  in  his  appreciation,  or  interest,  say 
to  the  line  D"E".  From  these  assumptions  we  may  derive  the 
curve  YDD'D"  to  indicate  his  appreciation  of,  or  interest  in, 
each  dollar  of  his  income. 

Another  way  of  stating  the  case  is  as  follows:  Assuming 
that  his  income  is  measured  by  the  line  OE",  to  give  up  one 
dollar  of  his  income  would  cause  him  a  sacrifice  measured  by 
the  line  D"E".  He  would  merely  have  to  give  up  some  unim- 
portant luxury  for  which  he  does  not  care  very  much.  If  he 
were  to  keep  on  giving  until  there  remained  an  amount  meas- 
ured by  the  line  OE' ,  he  would  have  deprived  himself  of  more 
and  more  important  things  or  of  things  for  which  he  cared 
more  and  more.  To  give  away  still  another  dollar  would  cost 
him  a  sacrifice  measured  by  the  line  D'E'.  If  now  he  keeps  on 
giving  until  there  is  left  only  an  amount  equal  to  OE,  he  will 
be  cutting  so  deeply  into  his  own  needs  that  each  dollar  given 
away  would  deprive  him  of  something  very  important  to  his 
own  well-being  and  would  occasion  him  a  sacrifice  measured 
by  the  line  DE. 

Interest  in  those  near  to  self.  But  this  man  has  an  interest 
in  someone  else  and  is  genuinely  desirous  of  seeing  that  other 
person  comfortable  and  happy.  In  case  that  other  person  is 
peculiarly  dear  to  him,  his  appreciation  of  that  person's  income 
might  be  quite  as  high  as  his  appreciation  of  his  own.  In  that 
case  the  same  curve,  YDD'D"  in  Diagram  A,  would  represent 
his  appreciation  of  the  other  person's  income.  But  he  will  not 
feel  so  deep  an  interest  in  very  many  people.  After  you  get 
beyond  the  members  of  his  immediate  family  and  a  few  inti- 
mate friends,  if  he  is  a  generous  man,  and  even  before  that, 
if  he  is  a  selfish  man,  you  will  find  people  in  whom  he  has  no 


ECONOMIC  DESIRES  25 

such  intense  interest.  In  this  case  his  appreciation  of  the  im- 
portance of  an  income  to  that  other  person  will  be  represented 
by  Diagram  B. 

In  Diagram  B  we  will  measure  the  income  of  the  other 
person,  whom  we  shall  call  B,  along  the  line  OX,  and  A's  ap- 
preciation of  B's  income  along  the  line  OF.  If  B's  income  is 
very  small,  measured,  let  us  say,  by  the  line  OE,  A  will  desire 
to  see  that  income  increased.  The  intensity  of  that  desire  of 
A  is  measured,  let  us  say,  by  the  line  DE.  If  now  A's  income 
is  measured  in  Diagram  A  by  the  line  OE",  he  will  be  willing 
to  give  up  a  part  of  his  own  income  in  order  to  add  to  B's 
income.  The  line  DE  in  Diagram  B  is  longer  than  the  line 
D"E"  in  Diagram  A. 

This  kind  of  giving  is  quite  consistent  with  the  fact  that 
A  cares  a  great  deal  more  for  himself  than  he  does  for  B.  The 
relative  height  of  the  two  curves  YDD'D"  in  Diagram  A  and 
YDD'  in  Diagram  B  indicates  the  degree  of  preference  for  him- 
self. Under  the  conditions  represented  in  the  two  diagrams, 
A  will  by  no  means  divide  evenly  with  B.  That  is  to  say,  he  will 
not  cut  his  own  income  down  from  an  amount  measured  by  OE" 
to  an  amount  measured  by  OE'  in  Diagram  A  in  order  to  in- 
crease B's  income  to  an  amount  measured  by  OE'  in  Diagram  B. 
That  would  give  them  equal  incomes;  but  A's  enjoyment  of 
the  last  dollar  of  B's  enlarged  income  would  be  measured  by 
the  line  D'E'  in  Diagram  B,  while  if  he  had  kept  that  dollar  for 
himself,  his  enjoyment  of  it  would  have  been  measured  by  the 
line  DE  in  Diagram  A. 

Interest  in  others  who  are  not  so  near  to  self.  When  it  comes 
to  some  other  person,  whom  we  shall  call  C,  who  is  so  distantly 
removed  from  A  in  space  or  in  kinship  that  A  takes  very  little 
interest  in  him,  we  may  find  that  A's  interest  is  represented 
by  the  curve  YD  in  Diagram  C.  Applying  the  same  compari- 
sons between  Diagrams  A  and  C  that  were  made  between 
Diagrams  A  and  B,  we  shall  find  that  A  might  give  up  a  dollar 
to  keep  C  from  starvation,  if  C's  condition  were  presented  to 


26  PRINCIPLES  OF  NATIONAL  ECONOMY 

him  pretty  strongly,  but  that  is  about  as  far  as  A  will  go  in 
relieving  C's  distress. 

Under  the  conditions  that  we  have  described,  A  would  pass 
as  a  very  benevolent  man.  If  he  were  what  is  ordinarily  re- 
garded as  a  selfish  man,  the  curves  YDD'  in  Diagram  B  and  YD 
in  Diagram  C  would  merely  be  somewhat  lower  than  we  have 
drawn  them,  or  the  curve  YDD'D"  in  Diagram  A  would  be 
higher  than  we  have  drawn  it. 

Nearness  in  kinship.  Even  though  a  generous  man  will  care 
a  great  deal  for  the  interests  of  a  great  many  people,  neverthe- 
less he  is  somewhat  self-centered  in  his  appreciation  of  or  inter- 
est in  others.  He  will  care  more  for  some  people  than  for  others, 
—more,  for  example,  for  his  own  wife  and  children  than  for 
other  men's  wives  and  children,  more  for  his  own  relatives  than 
for  other  people's  relatives,  more  for  his  own  neighbors  than  for 
other  people's  neighbors,  more  for  his  own  fellow  citizens  than 
for  the  citizens  of  other  countries.  Those  for  whom  he  cares 
most,  or  whose  interests  he  feels  most  keenly,  are  those  who 
are  in  some  way  closely  associated  with  himself.  They  are 
near  to  him,  if  we  may  be  permitted  to  use  the  word  "  near  "  in 
several  senses  besides  the  geometrical  or  geographical  sense. 
They  may  be  near  to  him  in  point  of  kinship.  Thus,  other 
things  equal,  he  will  be  more  generous  toward  his  near  of  kin 
than  toward  those  who  are  distantly  related  to  him,  toward 
human  beings  than  toward  animals,  and  toward'  the  higher 
than  toward  the  lower  animals.  Again,  mere  geometrical  near- 
ness counts  as  a  factor.  A  man  who  is  suffering  at  his  door  or 
in  his  immediate  neighborhood  will  move  him  more  than  a  man 
who  is  suffering  equally  but  who  is  a  long  way  off.  This  may 
sometimes  be  a  stronger  factor  than  nearness  of  kinship.  That 
is,  a  near  neighbor  who  needs  help  will  appeal  more  powerfully 
to  his  sympathy  than  a  near  relative  who  lives  a  long  way  off. 
He  may  even  do  more  for  an  animal  with  whom  he  is  closely 
associated,  such  as  a  favorite  horse,  dog,  or  cat,  than  for  some 
human  being  who  is  far  away.  Space  is  almost  as  important  a 
factor  as  kinship  in  limiting  his  interests. 


ECONOMIC  DESIRES 


Nearness  in  time  as  well  as  in  space.  Time  also  is  a  factor. 
Our  generous  man  is  more  interested  in  his  immediate  children 
than  in  his  distant  descendants,  more  in  his  contemporary  fel- 
low citizens  than  in  future  generations.  He  is  more  interested 
even  in  his  own  present  wants  than  in  his  future  wants.1 

There  are  other  senses  than  space,  kinship,  and  time  in  which 
the  word  "near"  can  be  used.  There  are  those  who  are  near 
in  the  sense  of  like-mindedness.  They  who  think  and  feel  on 
most  important  questions  as  he  thinks  and  feels  may  be  said  to 
be  near  him  in  a  very 
important  sense.  He 
is  pretty  certain  to 
care  more  for  them, 
other  things  equal, 
than  for  those  who 
think  and  feel  differ- 
ently. This  may  some- 
times prove  so  strong 
a  tie  as  to  cause  him 
to  desert  not  only  his  neighbors  and  fellow  citizens  but  even 
his  family  in  order  to  take  sides  with  those  who  think  and  feel 
as  he  does. 

In  short,  a  man's  interest  in  others  is  limited  by  the  factor 
of  distance  in  space,  time,  or  kinship,  and  in  unlikeness,  either 
physical,  moral,  or  mental.  The  greater  the  distance  which 
separates  them  from  him  in  any  or  all  of  these  respects,  the 
less  his  interest  in  them  tends  to  become ;  while  the  nearer  they 
are  to  him  in  any  or  all  of  these  respects,  the  more  intense  his 
interest  in  them  tends  to  become.  He  is  thus  self-centered  in 
his  appreciation  of  the  interest  of  others  even  when  he  is 
broadly  generous.  When  he  is  narrowly  selfish  he  is  more 
narrowly  self-centered. 

Self-centered  appreciation.  This  principle  of  self-centered  ap- 
preciation may  be  illustrated  by  the  diagram  above.  Let  us 

1  Cf .  Chapter  XXXVIII,  on  The  Desirability  of  Capital  and  its  Relation  to 
Interest. 


G' 


28  PRINCIPLES  OF  NATIONAL  ECONOMY 

assume  that  the  individual's  appreciation  of  the  interest  of 
various  persons,  including  himself,  is  measured  along  the  line 
.  OF.  Then  let  us  assume  that  he  himself  stands  at  the  point  O, 
while  others  are  ranged  along  the  line  OX  in  the  order  of  their 
nearness  to  himself  in  some  of  the  senses  in  which  we  have  used 
the  word  "nearness."  Let  us  take  kinship,  for  example.  Those 
nearest  of  kin  would  stand  on  the  line  OX  nearest  the  point  O, 
and  those  most  distantly  related  near  the  opposite  end,  or  the 
point  X.  We  will  now  let  the  curve  SS'  represent  the  selfish 
man's  appreciation  of  the  interests  of  various  persons.  The 
line  OS  measures  his  appreciation  of  his  own  interest,  or  his 
interest  in  himself.  His  appreciation  of  the  interests  of  another 
person  is  measured  by  the  perpendicular  distance  from  the  point 
on  the  line  OX  where  that  person  stands  to  a  point  on  the  line 
SS'.  Thus  his  appreciation  of  the  interests  of  his  immediate 
family  may  be  almost  as  high  as  his  appreciation  of  his  own 
interest.  But  he  cares  so  little  for  other  people,  and  those  for 
whom  he  cares  even  a  little  are  so  few  in  number,  that  the 
curve  SS'  falls  very  rapidly.  Distant  relatives  who  stand  be- 
yond the  point  S'  on  the  line  OX  do  not  concern  him  in  the 
slightest  degree.  He  has  no  appreciation  at  all  of  their  interests. 

In  the  case  of  G,  who  is  a  generous  man,  the  curve  is  differ- 
ent. It  is  represented  by  the  curve  GG'.  Following  the  same 
explanation  as  was  given  of  the  curve  SS',  we  find  that  the 
curve  GG  represents  him  as  caring  a  little  more  for  a  very  few 
persons  than  for  himself.  Then  his  interest  in  others  begins 
to  decline  the  farther  they  are  from  himself,  until,  when  we 
find  some  who  are  so  far  removed  as  to  stand  beyond  the  point 
G  on  the  line  OX,  his  interest  in  them  disappears  altogether. 

It  is  human  to  show  preferences.  Any  being  who  did  not 
show  such  preferences  as  these  would  scarcely  be  human.  He 
who  would  not  sacrifice  a  trifle  even  to  save  the  life  of  his 
nearest  of  kin  or  his  nearest  neighbor  would  not  be  a  man  but 
a  devil.  Again,  he  who  would  not  show  more  interest  in  his 
near  of  kin  than  in  his  distant  of  kin,  in  his  near  neighbors 
than  in  his  distant  neighbors,  in  his  fellow  citizens  than  in  the 


ECONOMIC  DESIRES  29 

citizens  of  other  countries,  in  kindly  disposed  men  than  in  evil- 
minded  men,  in  men  than  in  animals,  or  in  the  higher  than  in 
the  lower  animals,  would  not  be  much  better  than  a  devil.  If, 
in  a  struggle  between  a  man  and  a  tiger  or  a  man  and  a  disease 
germ,  he  did  not  show  some  disposition  to  favor  the  man,  or  if 
in  the  struggle  between  a  good  man  and  a  criminal  he  did  not 
show  a  preference  for  the  good  man,  we  should  probably  call 
him  by  some  pretty  hard  names.  Zeus  alone  among  the  gods 
has  been  represented  to  us  as  showing  no  preference  for  either 
the  Greeks  or  the  Trojans  in  their  memorable  struggle.  All 
the  lesser  gods  showed  preferences  and  took  sides,  but  he  main- 
tained an  attitude  of  supreme  indifference  to  the  petty  quarrels 
of  mortal  men.  If  you  will  try  to  appraise  his  morals  you  may 
find  some  difficulty  in  deciding  whether  they  were  godlike  or 
devilish.  They  certainly  were'  not  human. 

Does  it  work  well  to  be  self-centered  ?  We  come  now  to  the 
second  of  the  questions  stated  earlier  in  this  chapter.  Does 
it  work  well  or  badly  for  the  individual  to  show  self-interest 
or  to  be  self-centered  in  his  appreciation  of  human  interests? 
No  one  is  likely  to  deny  that  he  should  show  a  preference 
for  human  beings  as  compared  with  other  creatures.  We  hear 
a  few  vague  suggestions  now  and  then  to  the  effect  that  each 
one  should  be  a  friend  to  man  and  that  he  should  not  show 
preference  for  special  groups  or  classes  of  men.  Aside  from 
the  vagueness  of  the  idea  of  friendship  to  man  there  are  one 
or  two  difficulties.  Suppose  you  found  a  person  who  was  not 
a  friend  but  an  enemy  to  man,  should  you  befriend  him  or 
not  ?  If  you  befriend  an  enemy  of  man  are  you  yourself  a  very 
good  friend  to  man  ?  In  order  to  befriend  man  must  you  not 
be  an  enemy  to  the  enemies  of  man?  If  so,  you  must  dis- 
criminate and  show  a  preference  for  the  friends  of  man  as 
against  the  enemies  of  man.  In  other  words,  you  must  divide 
men  into  at  least  two  classes,  namely,  the  friends  and  the 
enemies  of  man,  and  show  more  regard  for  and  interest  in  one 
class  than  in  the  other.  In  the  case  of  the  average  individual 
these  classes  resolve  themselves  into  those  whom  he  approves. 


30  PRINCIPLES  OF  NATIONAL  ECONOMY 

on  the  one  hand,  and  those  whom  he  disapproves,  on  the  other. 
If  he  is  wise  in  his  approvals  and  disapprovals  this  will  prob- 
ably work  well.  He  lends  his  encouragement  and  strength  to 
those  who  pass  it  on, — who  use  the  strength  which  they  re- 
ceive from  his  friendship  in  doing  good  rather  than  evil.  Thus 
the  giver  does  more  good  than  he  would  if  he  gave  his  en- 
couragement and  strength  to  evil  men  and  good  men  alike.  He 
should  show  at  least  that  degree  of  preference  for  some  men  as 
against  others. 

Preferring  some  people  to  others.  But  granting  that  one  may 
be  justified  in  showing  a  preference  for  good  as  compared  with 
bad  men,  is  one  justified  in  showing  a  preference  either  for 
himself  or  for  those  who  are  near  to  him  in  any  of  the  senses 
which  we  have  been  discussing;  that  is,  for  his  family  or  his 
neighbors  as  compared  with  others  outside  those  circles  ?  There 
is  something  to  be  said  in  the  affirmative,  provided  the  prefer- 
ences are  not  too  extreme.  Volumes  have  been  written  on  this 
and  similar  problems,  and  doubtless  many  more  will  be  written. 
The  affirmative  argument  may  be  stated  briefly  in  the  form  of 
a  series  of  propositions : 

1.  Who  ought  to  look  after  and  safeguard  each  interest? 
Every  interest  ought  to  be  safeguarded  and  provided  for  by  the 
person  who  can  do  so  most  effectively.    National  or  social  wel- 
fare consists  in  the  most  complete  satisfaction  of  all  the  inter- 
ests of  all  the  people.    The  more  fully  and  completely  every 
interest  is  safeguarded  and  provided  for,  the  greater  the  prosper- 
ity and  welfare  of  the  whole  group.    Therefore,  when  each  and 
every  interest  is  looked  after  by  that  particular  person  who 
can  look  after  it  most  thoroughly  and  successfully,  the  social 
welfare  will  be  greater  than  it  would  be  if  some  interests  were 
looked  after  by  persons  who  were  not  best  fitted  to  do  so. 

2.  Generally  speaking,  but  with  a  few  exceptions,  each  and 
every  interest  can  best  be  safeguarded  and  looked  after  by  that 
person  who  knows  and  understands  it  most  intimately.    Jones 
probably  knows  his  own  interests  better  than  he  knows  those 
of  Smith.    If  so,  he  can  usually  look  after  his  own  interests 


ECONOMIC  DESIRES  31 

more  effectively  than  he  can  attend  to  those  of  Smith.  Like- 
wise, and  for  the  same  reasons,  Smith  can  look  after  his  own' 
interests  better  than  he  can  those  of  Jones.  Under  these  cir- 
cumstances the  interests  of  both  Jones  and  Smith  will  be  looked 
after  better  if  each  looks  after  his  own  than  if  each  looked  after 
the  other's.  However,  there  may  be  exceptions  to  this  rule. 
Jones  may  know  his  own  interests  better  than  Smith,  but  may 
be  in  some  unfortunate  condition  which  renders  him  unable  to 
look  after  them.  In  such  a  case,  even  though  Jones  does  know 
his  own  interests  better  than  Smith,  Smith  may  nevertheless  be 
able  to  look  after  them  better  than  Jones  can.  In  such  a  case  it 
would  promote  the  prosperity  of  that  community  of  two  if 
Smith  would  spend  a  part  of  his  time  looking  after  Jones's 
interests.  However,  as  soon  as  Jones  recovers  from  his  in- 
capacity it  will  be  better  for  both  if  they  return  to  their  normal 
habits  and  each  looks  after  his  own  interests. 

3.  Who  knows  each  interest  most  completely?    Generally 
speaking,  but  with  a  few  exceptions,  the  individual  of  mature 
years  and  sound  mind  knows  his  own  interests  more  intimately 
than  other  people  know  them  and  also  more  intimately  than  he 
knows  the  interests  of  other  people.    Young  children,  of  course, 
do  not  know  their  interests  as  well  as  these  are  known  by  their 
elders,  nor  do  persons  of  unsound  mind  know  their  interests  as 
well  as  these  are  known  by  individuals  of  sound  mind.     Oc- 
casionally a  mature  person  of  sound  mind  may  be  mistaken  in 
his  judgment  as  to  his  own  interests,  and  some  exceptionally 
wise  friends  may  know  them  better  than  the  person  himself 
does.    In  all  these  cases  there  are  excellent  reasons  why  wiser 
persons  should  take  a  great  deal  of  interest  in  the  affairs  of 
those  less  wise  than  they,  but  it  is  well  not  to  be  too  hasty  in 
assuming  that  you  are  wise  enough  to  look  after  the  interests 
of  a  mature  person  of  sound  mind  better  than  he  can  do  it 
himself. 

4.  Generally  speaking,  but  with  a  few  exceptions,  the  individ- 
ual knows  the  interests  of  his  near  of  kin  better  than  he  knows 
those  of  his  distant  of  kin,  of  his  fellow  citizens  better  than 


32  PRINCIPLES  OF  NATIONAL  ECONOMY 

those  of  citizens  of  other  countries,  of  members  of  his  own 
race  better  than  of  members  of  other  races.  He  is  in  much 
more  intimate  contact  with  the  members  of  his  immediate 
family  than  with  others,  and,  even  aside  from  all  questions  of 
affection,  he  can  gauge  their  desires  and  understand  their  needs 
better  than  he  can  the  desires  and  needs  of  those  with  whom  he 
is  not  so  intimately  associated.  That  is  a  sufficient  reason  why, 
in  the  economy  of  nature,  he  should  care  more  for  them  than 
for  others.  If  he  were  driven  by  his  affections  to  try  to  care 
for  those  whom  he  did  not  understand,  while  neglecting  those 
whom  he  did  understand,  he  would  bungle  much  more  than  he 
does.  Therefore  nature  is  wise  in  so  ordering  things  that 
affection  and  understanding  normally  go  together. 

5.  Generally  speaking,  but  with  a  few  exceptions,  the  individ- 
ual knows  the  interests  of  his  near  neighbors  more  intimately 
than  he  knows  those  of  his  distant  neighbors.    Here  again  it  is 
a  wise  provision  that  friendship  and  understanding  go  together. 

6.  Whom  can  we  reach  with  the  least  waste  of  energy  ?    Gen- 
erally speaking,  but  with  a  few  exceptions,  the  individual  can 
reach  his  near  neighbors  with  less  effort  and  waste  of  energy 
than  he  can  reach  his  distant  neighbors.    It  is  wise,  again,  that 
neighborly  feeling  develops  where  there  is  the  most  power  to 
help.    If  each  man  neglected  his  near  neighbors  and  attempted 
to  look  after  his  distant  neighbors,  while  their  near  neighbors 
in  turn  neglected  them  and  tried  to  look  after  their  distant 
neighbors,  there  would  be  much  working  at  cross  purposes,  and 
much  energy  would  be  wasted  because  each  tried  to  do  that 
which  he  was  not  well  situated  for  doing,  while  neglecting  the 
work  which  he  was  well  situated  for  doing. 

In  conclusion,  it  is  pretty  clear  that,  as  a  general  rule,  a 
community  in  which  each  individual  works  effectively,  looking 
after  those  interests  which  he  can  look  after  most  successfully 
and  with  least  waste  of  effort,  is  better  than  one  in  which  each 
individual  works  ineffectively,  trying  to  look  after  interests 
which  he  can  look  after  less  successfully  and  with  greater  waste 
of  effort.  Since  each  individual  knows  his  own  interests  and 


ECONOMIC  DESIRES  33 

the  interests  of  those  nearest  him  better  than  he  knows  the 
interests  of  those  farther  away,  we  must  justify  at  least  a 
moderate  amount  of  self-preference,  or  self-centered  apprecia- 
tion of  the  interests  of  others.  But  it  is  difficult  to  tell  just 
how  far  this  rule  should  be  carried.  When  communication  and 
transportation  were  very  difficult,  the  obstacles  in  the  way  of 
helping  people  who  were  a  long  way  off  would  have  made  it 
very  wasteful' to  try  to  do  very  much  for  them.  Only  one's 
near  neighbors  could  be  helped  effectively,  and  other  people 
outside  that  circle  had  to  be  left  to  their  near  neighbors,  if  they 
could  not  look  after  themselves.  Now  that  the  obstacle  of  dis- 
tance is  not  so  great  it  would  seem  to  be  economical  to  widen 
one's  geographical  neighborhood  somewhat. 

Harnessing  self-interest  to  public  uses.  Law  and  government 
can  do  little  or  nothing  toward  eliminating  self-interest,  even  if 
it  were  desirable  to  do  so,  which  it  is  not ;  but  it  is  possible  to 
harness  it  to  the  good  of  the  nation.  Assuming  that  a  man  will 
try  hard  to  promote  his  own  interests  and  the  interests  of  those 
nearest  to  him,  it  is  only  necessary  to  confine  his  efforts  to  the 
field  of  usefulness  or  productivity.  If  he  is  never  allowed  to 
rob,  steal,  or  do  any  injurious  act  in  trying  to  promote  his  own 
interest,  but  is  told  that  he  will  be  permitted  to  do  anything 
useful  and  receive  pay  for  it  or  to  produce  some  desirable  prod- 
uct and  sell  it,  he  will  then  have  a  very  strong  reason  for  doing 
useful  things  or  producing  desirable  objects.  If  a  desirable  ob- 
ject is  produced,  not  because  the  producer  has  a  benevolent 
interest  in  the  consumer  but  because  he  has  a  selfish  interest  in 
the  price  which  he  can  get  for  it,  it  will  do  the  consumer  just  as 
much  good  as  though  it  were  produced  for  benevolent  reasons. 
When  everyone  is  driven  by  self-interest  to  produce  as  much 
as  he  can  or  to  render  as  good  service  as  he  can,  there  will  be  a 
great  deal  produced  and  much  good  service  rendered.  There- 
fore, even  if  one  did  not  approve  of  any  degree  of  self-interest 
whatever,  one  might  consistently  admit  that  the  law  was  mak- 
ing the  very  best  of  a  bad  situation  by  thus  harnessing  that 
powerful  motive  to  useful  service  and  productive  work.  Seeing 


34 


PRINCIPLES  OF  NATIONAL  ECONOMY 


that  the  law  could  not  possibly  transform  self-interested  per- 
sons into  benevolent  persons,  the  next  best  thing  would  cer- 
tainly be  to  hedge  them  about  so  as  to  make  it  impossible  for 
them  to  pursue  their  own  self-interest  in  any  except  useful  and 
productive  lines. 

No  visible  harmony  of  human  interests.  This  does  not  as- 
sume that  there  is  any  such  thing  as  a  natural  harmony  of 
human  interests.  If  anything  is  clear  it  is  that  human  interests 
are  frequently  in  conflict.  Unless  there  is  an  umpire  or  a 
tribunal  to  decide  these  questions  of  conflict,  an  overdeveloped 
self-interest  will  frequently  drive  men  into  actual  conflict  or 
lead  one  to  do  something  in  his  own  interest  which  would  be 
injurious  to  others.  It  is  one  of  the  functions  of  law  and  gov- 
ernment to  adjudicate  these  conflicts  and  also  to  forbid,  with 
suitable  penalties,  any  injurious  act.  When  the  laws  are  in- 
telligently framed  and  rigidly  executed  this  leaves  the  individual 
no  choice.  However  self-interested  he  may  be,  and  however 
indifferent  he  may  be  to  the  interests  of  others,  he  must  seek 
his  self-interest  by  useful  rather  than  by  injurious  acts.  When 
he  is  thus  efficiently  controlled  the  more  intense  his  self-interest 
becomes,  and  the  more  intense  his  interest  in  his  family  or  near 
friends,  the  more  intensely  he  will  strive  to  do  useful  things,  not 
because  he  wants  to  be  useful  but  because  he  wants  the  reward 
of  usefulness.  To  harness  this  powerful  motive  of  self-interest 
to  the  kinds  of  work  which  benefit  the  nation — which  increase 
wealth  and  prosperity — is  like  harnessing  a  great  natural  force 
like  steam  or  electricity.  In  the  one  case  the  harness  consists 
of  laws  and  regulations ;  in  the  other  it  consists  of  mechanical 
devices. 

It  has  been  shown  above  that  all  desires  are  satiable  and  that 
they  are  self-centered.  It  is  necessary  to  understand  both  these 
facts  before  we  can  go  very  far  in  our  study  of  economics. 
But  what  of  desire  itself  ?  What  does  it  mean  to  the  economist 
and  what  is  its  economic  function  ? 

Desire  a  symptom  of  dependence.  A  desire  for  a  physical 
object  is  a  symptom  of  the  dependence  of  the  organism  upon 


ECONOMIC  DESIRES  35 

something  outside  itself.  This  dependence  may  be  of  various 
kinds  and  degrees.  The  organism  may  depend  upon  something 
outside  itself  for  its  life,  well-being,  or  comfort,  or  merely  for 
its  pleasure,  convenience,  or  amusement.  An  unsatisfied  desire 
is  a  symptom  of  a  lack,  in  the  time  and  place  where  the  desire 
is  felt,  of  something  upon  which  the  organism  depends.  The 
complete  satisfaction  or  satiation  of  a  desire  is  a  symptom  of 
the  sufficient  abundance,  but  not  superabundance,  of  the  ob- 
ject of  the  desire.  When  the  object  is  too  abundant  it  may 
become  an  object  not  of  desire  but  of  repugnance,  even  though 
in  smaller  quantities  the  same  thing  would  be  an  object  of 
strong  desire.  The  timber  which  once  stood  on  the  farmer's 
land  and  had  to  be  cleared  away  before  he  could  grow  crops 
will  serve  as  an  example  of  superabundance.  Timber  in  almost 
any  modern  community,  where  it  is  needed  for  fuel  and  for 
building  purposes,  will  serve  as  an  example  of  scarcity. 

The  complete  satisfaction  of  all  desires  whatsoever,  if  such 
a  condition  can  be  imagined,  would  be  a  symptom  of  the  suffi- 
cient abundance  of  everything  upon  which  the  organism  de- 
pended in  any  way  or  in  any  degree.  Such  a  condition  would 
be  one  of  complete  adaptation,  a  complete  harmony  between  the 
organism  and  its  material  environment. 

The  two  roads  to  harmony.  In  the  direction  of  that  state  of 
harmony  two  roads  lie  open — for  a  little  way  at  least.  No  one 
knows  how  far  they  lead.  One  road  is  known  in  the  Orient  as 
the  Way  of  Nirvana,  or  emancipation  from  craving.  By  the 
eradication  of  all  craving  from  our  minds,  if  that  could  be  ac- 
complished, we  should  certainly  reach  a  state  wherein  there 
would  be  no  dependence  upon,  or  scarcity  of,  things  outside 
ourselves.  We  know  that  we  can  travel  this  road  for  a  little 
way ;  that  is,  we  can  discipline  ourselves  in  the  virtues  of  the 
simple  life,  and  we  can  learn  to  like  certain  things  whereof 
nature  is  bounteous,  such  as  air,  sunlight,  and  the  clouds,  the 
green  of  the  fields  and  the  blue  of  the  sky,  and  we  can  learn 
to  think  less  of  those  things  whereof  nature  is  niggardly  in  her 
supply,  such  as  objects  of  ostentatious  display,  luxury,  and 


36  PRINCIPLES  OF  NATIONAL  ECONOMY 

pride.  This  would  reduce  somewhat  our  feeling  of  dependence 
upon  objects  outside  ourselves,  or  at  least  it  would  reduce  our 
sense  of  irritation  at  the  everlasting  scarcity  of  the  things  upon 
which  our  happiness  seems  now  to  depend.  But  that  we  can 
eradicate  all  desire  scarcely  seems  possible. 

The  way  of  labor.  The  other  road  is  the  way  of  labor.  They 
who  follow  this  road,  instead  of  eradicating  or  repressing  their 
desires,  labor  to  increase  the  abundance  of  whatever  objects 
they  happen,  for  any  reason,  to  desire,  provided,  of  course, 
nature  has  not  already  supplied  them  in  sufficient  abundance 
when  and  where  they  are  desired.  They  also  labor  to  decrease 
the  supply  of  whatever  objects  happen,  for  any  reason,  to 
arouse  their  repugnance.  We  occidentals  generally  prefer  the 
way  of  labor,  and  we  are  very  certain  that  we  can  travel  it  for 
a  little  way.  Perhaps  the  oriental  mind,  wearying  of  the  ever- 
lasting struggle  of  population  against  scarcity  and  not  being 
gifted  with  our  mechanical  ingenuity,  despaired  of  making 
much  progress  in  this  direction  and  turned  to  Nirvana  as  the 
more  hopeful  alternative.  We  occidentals  have  not  yet  begun 
to  suspect  that  there  is  any  limit  to  our  possible  progress  in 
production,  therefore  we  are  not  yet  ready  to  forsake  it  for  the 
road  to  Nirvana.  The  Occident,  with  its  mechanical  ingenuity 
and  its  love  of  strenuous  action,  finds  it  easier  to  increase  its 
production  than  to  control  its  desires  or  to  emancipate  itself 
from  craving. 

The  restless  effort  of  body  and  mind  to  produce  everything 
we  desire  is  the  dominant  fact  in  the  economic  life  of  Western 
nations.  It  also  dominates,  though  in  less  degree,  the  economic 
life  of  the  Eastern  world.  The  philosophic  doctrine  of  Nirvana 
is  little  more  than  a  protest  against  it.  The  pursuit  of  the  means 
of  satisfying  desire  is  the  all  but  universal  occupation.  The 
great  mass  of  people  everywhere  are  driven  by  their  unsatisfied 
desires.  These  are  the  great  motive  forces  in  all  human  activity. 
A  completely  satisfied  or  satiated  desire  ceases  to  be  a  motive 
force,  ceases  to  cause  men  to  act.  A  state  of  universal  and  com- 
plete satisfaction  might  be  a  blissful  state,  but  it  would  not  be 


ECONOMIC  DESIRES  37 

an  active  state  unless,  indeed,  the  chief  desire  were  for  action 
itself.  Unless  that  were  the  chief  desire  there  would  not  be 
much  going  on. 

Human  activity  determined  by  desire.  Not  only  must  we  look 
for  the  springs  of  human  action  in  the  unsatisfied  desires  of 
men,  but  we  must  also  expect  to  find  that  the  direction  of  men's 
activities  is  determined  by  the  character  of  their  desires  and 
that  the  intensity  of  their  action  is  determined  by  the  degree  of 
unsatisfaction  in  which  the  desires  are  found.  The  expression 
"degree  of  unsatisfaction"  is  a  more  accurate  way  of  saying 
what  is  sometimes  meant  by  the  "intensity  of  desire."  When  a 
desire  is  completely  satisfied  it  has  no  intensity ;  it  ceases  to 
exist  as  a  motive  force.  When  it  falls  short  of  complete  satis- 
faction it  has  some  degree  of  intensity,  and  the  further  it  falls 
short  the  more  intense  it  becomes.  Therefore  it  is  important 
that  we  understand  the  nature  of  our  desires,  especially  those 
which  are  normally  unsatisfied.  Before  we  can  get  very  far  in 
the  study  of  economic  activities  we  must  understand  what  it  is 
all  about.  It  is  concerned  with  the  satisfaction  of  those  desires 
which  are  normally  unsatisfied,  which  can  be  satisfied  only 
through  some  conscious  effort.  Literally,  that  is  what  it  is  all 
about. 

To  sum  up,  we  find  that  desire  (that  is,  unsatisfied  desire) 
is,  first,  a  symptom  of  the  fact  that  something  is  lacking  in 
the  adjustment  of  man  to  nature,  or  that  something  needs  im- 
proving in  the  relation  of  man  to  his  surroundings ;  second,  it 
furnishes  a  motive  for  action  in  overcoming  the  lack  or  effect- 
ing the  improvement.  The  fact  that  desires  are  satiable  indi- 
cates that  the  imperfect  adjustment  of  man  to  nature  may  be 
improved  and  perfected  by  increasing  the  supply  of  the  thing 
desired.  The  fact  that  desires  are  self-centered  makes  it  pretty 
certain  that  our  activities  will  be  a  little  more  strenuous  in  the 
satisfaction  of  our  own  desires  and  the  desires  of  those  who  are, 
in  some  sense,  "near"  to  us,  than  in  the  satisfaction  of  the  de- 
sires of  other  beings.  These  facts  give  direction  and  character 
to  most  of  our  economic  activities. 


CHAPTER  III 
ECONOMIC  GOODS 

I  Objects  of  repugnance  (Nuisances  or  C  Harmful  to  man 
"  Illth  ")  I  Useful  but  superabundant 

^IT        1  U      .  t     1 

.........  f  Useless  but  not  harmful 

Objects  of  indifference-!  TT    ,  ,  , 
L  Useful  but  sufficient  (free  goods) 
Objects  of  desire  (Economic  Goods,  or  Wealth) :  Useful  and  scarce 

The  physical  objects  with  which  we  are  surrounded  may  be 
grouped  under  three  classes  according  as  our  attitude  toward 
them  is  one  of  repugnance,  indifference,  or  desire.  In  other 
words,  they  are  either  objects  of  repugnance,  objects  of  in- 
difference, or  objects  of  desire. 

Objects  of  repugnance.  Objects  of  repugnance  include  not 
only  those  few  things  which  are  always  and  everywhere  thought 
to  be  harmful  but  also  a  much  larger  number  of  things  which 
are,  under  certain  circumstances,  useful  but,  under  other  cir- 
cumstances, become  harmful  because  of  their  superabundance. 
Nothing,  for  example,  could  be  more  useful  than  water,  but  too 
much  water,  especially  in  our  cellars  or  in  swampy  land,  be- 
comes an  object  of  active  repugnance.  We  work  as  hard  to  get 
rid  of  the  surplus  when  there  is  too  much  as  we  do  to  get  a 
larger  supply  when  there  is  not  enough.  Many  of  the  weeds 
in  the  farmer's  fields  have  some  uses,  but  they  are  so  abun- 
dant as  to  interfere  with  the  farmer's  crops  and  are  therefore 
nuisances. 

Free  goods.  There  are  not  many  things  that  are  always  and 
everywhere  objects  of  indifference  or  that  are  never  either  use- 
ful or  harmful.  There  are  a  good  many  things  that  are  objects 
of  indifference  merely  because  they  are,  in  the  circumstances  of 
time  and  place,  amply  sufficient  for  all  our  needs,  but  not  so 

38 


ECONOMIC  GOODS  39 

abundant  as  to  do  us  any  harm.  Air  is  the  most  familiar  ex- 
ample of  this  kind  of  sufficiency.  In  many  places  there  is 
enough  water,  but  not  so  much  as  to  cause  us  any  annoyance. 
Wherever  this  kind  of  sufficiency  is  found  we  are  found  to  be 
indifferent  toward  the  sufficient  object.  There  is  no  good'  rea- 
son why  we  should  pay  much  attention  to  things  of  this  class. 
We  are  interested  in  improving  our  condition.  If  a  given  thing 
is  sufficient  for  all  our  needs  and  not  so  abundant  as  to  bother 
us  in  any  way,  our  condition  with  respect  to  that  thing  cannot 
be  improved.  It  would  be  economical  of  our  time  and  strength 
to  reserve  them  for  improving  conditions  that  need  improving. 
Our  indifference  toward  things  that  need  no  improving  is,  there- 
fore, a  means  of  economizing  our  time  and  strength  and  enables 
us  to  apply  ourselves  to  those  things  that  are  either  too  abun- 
dant or  not  abundant  enough  for  our  highest  well-being. 

Economic  goods.  While  we  must  obviously  give  a  good  deal 
of  attention  to  objects  of  repugnance  and  try  to  thin  them  out; 
or  reduce  their  supply,  our  chief  concern  nowadays  is  with 
objects  of  desire,  or  objects  of  which  we  desire  more  than  we 
have.  Those  peoples  who  have  gained  very  little  control  over 
nature  and  who  are  therefore  living  under  savage  surroundings 
were  much  more  concerned  with  objects  of  repugnance  than 
we  are.  We  are  still,  however,  actively  combating  weeds,  para- 
sites, disease  germs,  etc.,  in  spite  of  the  fact  that  our  chief  ac- 
tivity is  the  pursuit  of  objects  of  desire  rather  than  fighting 
objects  of  repugnance.  The  problem  of  getting  more  than  we 
have  of  certain  scarce  things  is  the  problem  of  income,  of  pro- 
duction, and,  in  a  very  large  sense,  of  human  adaptation. 

What  are  economic  goods  ?  Before  we  can  go  very  far  in 
our  study  of  income  and  expenditure,  or  of  production  and  con- 
sumption, we  must  get  a  fairly  clear  idea  as  to  the  sort  of  things 
that  make  up  income,  or  the  sort  of  things  that  men  try  to 
produce.  When  it  was  stated  in  the  first  chapter  that  the 
necessity  for  economy  arose  out  of  the  fact  of  scarcity,  it  might 
have  been  guessed  at  once  that  scarcity  has  a  great  deal  to  do 
with  our  concept  of  wealth  and  with  our  efforts  to  produce  it. 


40  PRINCIPLES  OF  NATIONAL  ECONOMY 

More  accurately,  perhaps,  we  should  say  that  the  only  things 
we  try  to  produce  are  the  things  of  which  we  do  not  have 
enough.  It  may  sound  a  little  queer  at  first  for  one  to  say  that 
his  income  consists  of  things  that  are  scarce,  or  things  of  which 
he  does  not  have  enough.  It  will,  therefore,  be  necessary  to 
spend  some  time  in  making  this  point  absolutely  clear,  other- 
wise we  shall  never  be  free  from  error  and  confusion.  As  a 
matter  of  fact,  the  very  first  step  toward  a  true  understanding 
of  the  nature  of  wealth  is  a  clear  perception  that  wealth  in  the 
economic  sense  consists  of  things  that  are  scarce  and  for  that 
reason  need  to  be  economized.  When  it  is  said  that  the 
necessity  for  economy  grows  out  of  scarcity  and  that  we  try 
to  produce  only  the  things  that  are  scarce,  we  do  not  imply 
that  everything  is  scarce.  Some  very  useful  things  are  very 
abundant — so  abundant  that  everyone  can  have  all  he  wants ; 
and  when  he  gets  all  he  wants  no  one  else  is  deprived  of  any- 
thing that  he  wants.  Such  things  do  not  have  to  be  economized, 
hence  they  are  not  economic  goods.  In  fact,  so  long  as  they  are 
sufficiently  abundant  they  give  us  no  concern,  but  when  they 
become  scarce  we  spend  our  time  in  trying  to  get  more.  Only 
those  things  are  economic  goods  which  have  to  be  economized ; 
that  is,  which  are  scarce,  or  of  which  we  do  not  have  as  much 
as  we  should  like. 

Two  meanings  of  "wealth."  Now  the  word  "wealth"  has  two 
meanings.  In  the  first  place,  it  is  the  collective  name  for  all 
economic  goods, 'or  for  all  goods  that  have  to  be  economized; 
that  is,  for  goods  that  are  scarce.  In  the  second  place,  it  is  the 
name  of  a  condition  or  state  of  being.  It  comes  from  the  older 
word  "weal,"  which  means  very  much  the  same  as  "well-being." 
These  two  meanings,  while  apparently  different,  are  yet  very 
closely  related.  The  condition  of  well-being  which  we  call 
wealth  depends  upon  the  possession  of  an  adequate  supply  of 
those  things  which  we  call  wealth ;  that  is,  the  things  which  are 
ordinarily  scarce  and  which  have  to  be  economized.  He  who 
lacks  an  adequate  supply  is  poor ;  he  who  possesses  an  adequate 


ECONOMIC  GOODS  41 

supply  is  rich  or  in  a  state  of  wealth.  In  short,  those  economic 
goods  called  wealth  are  the  goods  upon  which  weal,  or  well- 
being,  depends.  Well-being  is  increased  when  these  goods  are 
increased  or  economized ;  well-being  is  decreased  when  these 
goods  are  decreased  or  wasted. 

How  well-being  depends  upon  wealth.  It  could  not  be  said 
of  anything  which  is  not  scarce  that  our  well-being  increases 
when  we  have  more  of  it  and  decreases  when  we  have  less  of  it. 
There  is  such  an  abundance  of  air,  for  example,  under  ordinary 
circumstances,  that  no  one  would  be  any  better  off  than  he  is 
now  if  the  supply  of  air  could  be  increased,  nor  would  anyone 
be  any  worse  off  if  the  supply  of  air  were  slightly  decreased. 
In  other  words,  no  one's  well-being  depends  upon  more  air, 
even  if  it  could  be  produced.  If,  however,  air  were  so  scarce 
that  there  was  not  enough  to  go  around,  then  not  only  would 
it  need  to  be  economized  very  carefully  but  there  would  be  some 
advantage  in  producing  more  of  it.  The  weal,  or  well-being, 
of  mankind  would  be  improved  in  proportion  as  more  air  could 
be  produced ;  mankind  would  be  injured  in  proportion  as  air 
was  wasted  or  destroyed.  While,  therefore,  we  can  say  that  air 
is  a  necessity  in  a  certain  absolute  sense,  yet  in  a  practical  eco- 
nomic sense  we  cannot  say  that  anyone  would  be  better  off  if 
more  air  were  produced  or  if  it  were  even  wisely  economized ; 
nor  can  we  say  that  anyone  would  be  worse  off  if  a  little  air 
were  destroyed  or  wasted.  There  would  still  be  enough  to 
satisfy  everybody.  That  is  why  air,  though  an  absolute  neces- 
sity, is  not  an  economic  good.  We  should  gain  nothing  by  try- 
ing to  increase  the  supply  or  to  economize  in  the  use  of  the 
existing  supply.  Since  we  do  not  gain  anything  by  economizing 
it,  it  is  not  an  economic  good.  Where  abnormal  circumstances 
arise,  in  which  there  is  not  enough  air,  then  it  has  to  be  econ- 
omized and  becomes  at  that  particular  time  and  place  an 
economic  good.  If  such  circumstances  could  last,  air  would 
become  wealth  in  the  same  sense  that  food,  clothing,  fuel,  and 
certain  other  things  are  now  wealth.  It  would  then  be  true  of 


42  PRINCIPLES  OF  NATIONAL  ECONOMY 

air,  as  of  these  other  things,  that  well-being  could  be  increased 
by  producing  or  economizing  air  and  decreased  by  destroying  it, 
wasting  it,  or  otherwise  making  it  scarcer. 

The  question  of  having  more  or  having  less.  Water  is  another 
illustration ;  perhaps  a  better  one,  because  there  are  many 
places  where  water  is  so  abundant  that  it  does  not  have  to  be 
economized  at  all,  while  there  are  other  places  where  it  is  so 
scarce  that  it  has  to  be  economized  very  carefully  indeed.  In 
the  former  places  water  is  not  wealth;  in  the  latter  it  is.  In 
the  former  no  one  labors  to  secure  any  more ;  in  the  latter  they 
do.  In  the  former  no  one  would  be  better  off  if  there  were 
more  water;  in  the  latter  some  people  would  be  better  off. 
In  the  former  well-being  does  not  depend  upon  a  little  more  or 
a  little  less  water ;  in  the  latter  it  does.  In  the  former  there 
is  no  occasion  for  economizing  water ;  in  the  latter  it  is  very 
important  that  it  be  economized  and  made  to  go  as  far  as  pos- 
sible. In  the  former  the  formula  "more  water,  greater  well- 
being;  less  water,  less  well-being"  is  not  true;  in  the  latter 
it  is  true.  This  is  the  test  in  every  time  and  place  as  to  whether 
water  is  wealth  or  not.  All  that  has  been  said  of  water  may  be 
said  of  anything  else.  The  same  test  must  be  applied  to  deter- 
mine whether  it  is  wealth  or  not.  As  a  matter  of  fact,  water, 
like  a  great  many  other  things,  is  sometimes  too  abundant,— 
so  abundant  that  men  find  it  to  their  advantage  to  go  to  con- 
siderable pains  in  order  to  get  rid  of  some  of  it  or  to  lessen  the 
supply.  In  such  cases  it  may  be  called  tilth. 

Relation  of  value  to  economic  goods.  We  have  gone  to  con- 
siderable pains  to  point  out  that  one  characteristic  of  economic 
goods  is  that  they  are  always  scarce.  It  is  this  which  gives  them 
the  power  to  induce  men  to  work  and  to  economize.  Another 
characteristic  is  that  they  all  have  value  or  power  in  exchange. 
The  power  to  command  other  desirable  things  in  peaceful  and 
voluntary  exchange — that  is,  value — is  very  much  the  same  as 
the  power  to  induce  men  to  work.  That  is  to  say,  the  thing 
which  possesses  one  kind  of  power  will  always  possess  the  other, 
if  indeed  it  be  not  incorrect  to  speak  of  them  as  different  kinds 


ECONOMIC  GOODS  43 

of  power.  The  object  which  possesses  this  power  to  appeal 
to  human  motives  in  such  a  way  as  to  induce  men  either  to 
give  up  some  desirable  object  in  exchange  for  it  or  to  labor 
in  order  to  produce  it  is  always  said  to  be  valuable.  This  power 
depends  in  all  cases  upon  the  scarcity  or  insufficiency  of  the 
existing  supply  of  the  object  in  question.  This  simply  amounts 
to  the  truism  that  a  thing  would  not  possess  this  power  unless 
someone  could  be  found  who  wanted  more  of  it  than  he  had. 
If  a  person  or  a  considerable  number  of  persons  can  be  found 
who  want  more  than  they  have,  there  will  be  someone  who  will 
give  up  something  in  order  to  get  more  or  who  will  work  in 
order  to  produce  more.  These  things,  again,  are  economic 
goods,  or  wealth.  Since,  as  we  have  just  shown,  they  all  possess 
value,  it  amounts  to  the  same  thing  to  say  that  wealth  consists 
of  things  that  have  value.  In  short,  such  words  as  "wealth," 
"value,"  "economic  goods,"  and  "economy"  all  center  around 
the  one  great  fact  of  scarcity ;  that  is,  the  insufficiency  of  cer- 
tain things  at  certain  times  and  places  to  satisfy  desires.  Out 
of  this  great  fact  grow  also  such  ideas  as  property,  industry,  and 
foresight.  No  one  wants  to  secure  property  rights,  for  example, 
in  anything  of  which  everybody  has  enough.  But  when  any- 
one fears  that  there  may  not  be  enough  of  a  certain  thing  to  go 
around,  and  that  he  may,  therefore,  be  left  out,  he  naturally 
wants  to  guard  against  that  calamity  by  getting  possession  of 
a  supply.  He  will  try  to  get  possession  of  a  supply  either  by 
producing  it  himself  or  by  buying  it  of  someone  else,  and  he 
will  try  to  guard  his  treasure  carefully.  When  the  state  steps 
in  and  undertakes  to  protect  him  in  his  possession,  he  has  then 
secured  a  property  right  in  the  thing  in  question.  Again,  pro- 
ductive industry,  as  already  shown,  is  directed  toward  alleviat- 
ing scarcity  or  increasing  the  supply  of  something  of  which  the 
supply  would  otherwise  be  insufficient.  Frugality  and  foresight 
are  exercised  to  provide  against  scarcity. 

Meaning  of  scarcity.  Now  scarcity  means  nothing  except 
insufficiency  in  a  given  time  and  place  to  satisfy  the  desires 
which  exist  in  that  time  and  place.  It  does  not  mean  rarity, 


44  PRINCIPLES  OF  NATIONAL  ECONOMY 

because,  no  matter  how  rare  a  thing  may  be,  if  there  is  as  much 
as  is  wanted  it  is  not  scarce  ;  and  no  matter  how  great  the  total 
quantity,  if  there  is  less  than  is  wanted  it  is  insufficient,  or 
scarce.  And  it  is  always  well  to  bear  in  mind  that  a  thing  is 
scarce,  if  at  all,  because  the  available  quantity  in  a  given  time 
and  place  is  insufficient.  No  matter  how  much  water  there  may 
be  in  the  Mississippi  River,  it  does  not  alter  the  fact  that  water 
is  scarce  a  few  hundred  miles  to  the  westward ;  no  matter  how 
much  copper  there  may  be  in  the  bowels  of  the  earth,  it  does 
not  alter  the  fact  that  there  is  less  copper  in  available  form 
than  is  needed  on  the  surface.  It  is  this  fact  which  induces 
men  to  labor  to  move  things  from  one  place  to  another. 

Mistaken  valuations.  Before  proceeding  farther  it  is  nec- 
essary to  make  one  important  qualification — men  do  not  always 
know  upon  what  their  weal,  or  well-being,  depends.  If  they  are 
mistaken  on  any  phase  of  this  question,  they  will  be  placing  a 
high  value  upon  some  things  that  are  not  good  for  them  and  a 
low  value  or  no  value  at  all  upon  some  things  that  are  good  for 
them.  They  are  poor  economizers  who  do  this,  but  there  are 
many  poor  economizers  in  the  world.  This  is  the  same  as  say- 
ing that  they  will  sometimes  desire  more  of  a  thing  than  they 
have  when  they  really  have  too  much  already,  or  less  than  they 
have  when  they  really  have  too  little  already.  With  this  qual- 
ification in  view,  all  we  can  say  is  that  men  will  regard  as  wealth 
everything  upon  which  they  think  their  well-being  depends  in 
the  practical  economic  sense  described  above.  That  is,  if  they 
think  they  need  more  than  they  have,  they  will  strive  to  get 
more,  either  by  offering  something  for  it,  thus  giving  it  a  market 
value,  or  by  trying  to  produce  it,  thus  creating  an  industry. 
This  explains  why  it  is  that  the  student  of  economics  is  some- 
times compelled  to  include  among  economic  goods,  or  wealth, 
articles  which  he  himself  would  not  use  or  which  he  regards  as 
deleterious,  such  as  opium,  alcoholic  drinks,  or  tobacco. 

Importance  of  desiring  the  right  things.  Teaching  or  per- 
suading people  to  want  the  right  things  has  commonly  been 
regarded  as  the  work  of  the  educator  and  the  preacher  rather 


ECONOMIC  GOODS  45 

than  the  economist.  The  latter  has  not  generally  undertaken 
to  pass  judgment  on  the  wants  of  the  people.  He  has  assumed, 
rather,  that  his  work  was  done  when  he  had  shown  how  such 
wants  as  the  people  happen  to  have  are  satisfied  and  may  be 
satisfied  more  and  more  fully.  But  no  one  who  really  has  at 
heart  the  welfare  of  the  people  can  be  indifferent  to  the  quality 
of  their  wants  or  desires.  What  men  want  most  they  will  try 
hardest  to  get ;  the  character  of  their  wants  or  desires,  rather 
than  their  real  needs,  will  therefore  determine  the  character  of 
their  industries  and  their  government.  But,  more  important  than 
that,  if  their  desires  are  opposed  to  their  needs  (that  is,  if  they 
desire  things  that  are  harmful  to  them,  then  the  more  efficient 
their  system  of  production  becomes  the  more  harm  they  will  do 
themselves.  In  that  case  an  efficient  industrial  system  promotes 
national  deterioration  rather  than  national  well-being.  If  one 
were  to  make  a  study  of  the  wreckage  of  nations,  one  would 
probably  find  that  more  had  gone  to  pieces  because  their  wants 
were  wrong  than  because  they  were  not  able  to  supply  their 
wants.  That  is  one  reason  why,  as  stated  earlier  in  this  chapter, 
the  subject  of  consumption  is  of  such  tremendous  importance. 
Necessity  of  economizing  means  of  production.  Thus  far  in 
discussing  the  necessity  for  economy  we  have  been  considering 
the  means  of  satisfying  our  wants  directly.  But  we  must  con- 
sider also  the  necessity  of  economizing  the  indirect  means  of 
satisfying  wants.  In  the  effort  to  overcome  scarcity  (that  is,  in 
the  production  of  goods)  it  is  necessary  to  make  use  of  various 
factors  of  production,  such  as  labor,  tools,  raw  materials,  etc. 
These  also  are  scarce  and  have  to  be  economized.  To  be  sure, 
many  things  that  are  essential  to  production  are  not  scarce. 
These  are  not  considered  as  factors  of  production ;  that  is,  they 
are  not  economic  factors  of  production  at  all.  Carbon  dioxide 
is  just  as  essential  to  the  growing  of  plants  as  nitrogen,  phos- 
phorus, or  potash,  but  there  is  plenty  of  carbon  dioxide  in  the 
air,  whereas  in  most  soils  nitrogen,  phosphorus,  and  potash  are 
scarce  or  tending  to  become  scarce.  Therefore  these  three  sub- 
stances are  considered  as  factors  (that  is,  economic  factors)  in 


46  PRINCIPLES  OF  NATIONAL  ECONOMY 

plant  growth.  Applying  the  same  formula  here  as  we  did  to 
other  things  earlier  in  this  discussion,  the  average  farmer  can 
say,  and  say  truly,  "More  nitrogen,  more  plant  growth;  less 
nitrogen,  less  plant  growth."  Therefore  agricultural  produc- 
tion is  increased  by  increasing  the  nitrogen  in  the  soil.  The 
same  may  be  said  of  phosphorus  and  potash,  but  the  formula 
does  not  apply  to  carbon  dioxide.  This  is  a  principle  of  the 
very  greatest  importance,  as  will  be  seen  later.  Some  of  the 
greatest  problems  in  economics  and  social  justice  depend  upon 
this  formula  and  are  incapable  of  solution  without  it. 

Why  a  thing  has  value.  The  fact  that  desirability  and  scar- 
city, and  these  alone,  give  value  to  a  thing  is  perhaps  clearly 
enough  established  by  this  time.  Few  will  care  to  question  the 
statement  that  not  only  must  men  desire  a  thing,  but  they  must 
desire  more  than  they  have  before  they  will  strive  to  get  more 
either  by  purchasing  it  or  by  producing  it.  Moreover,  this  is  as 
true  of  a  factor  used  in  production,  such  as  tools,  as  of  an  article 
of  direct  consumption,  such  as  bread.  It  may  not  be  quite  so 
obvious,  but  it  is  none  the  less  true,  that  this  is  also  one  of  the 
great  sources  of  that  conflict  of  human  interests  which  gives 
rise  to  most  of  our  problems  of  justice  and  equity.  This  will 
be  discussed  in  the  next  chapter. 

TEN  CHARACTERISTICS  OF  ECONOMIC  GOODS,  OR  WEALTH 

1.  They  are  scarce;  that  is,  there  is  less  of  them  than  is  wanted. 

2.  They  have  to  be  economized. 

3.  Well-being  is  thought  to  increase  as  they  increase  and   to 
decrease  as  they  decrease. 

4.  Men  labor  to  produce  them  ;  that  is,  to  make  them  less  scarce. 

5.  Men  try  to  secure  them  by  purchase. 

6.  They  have  value,  or  power  in  exchange. 

7.  They  become  the  subject  of  property  rights. 

8.  Wise  men  exercise  frugality  and  foresight  with  respect  to  them. 

9.  There  is  a  conflict  of  interests  among  men  with  regard  to 
them,  because  there  is  not  enough  of  them  to  go  around  and  satisfy 
everybody. 

10.  They  give  rise  to  questions  of  justice  and  equity. 


CHAPTER  IV 

ECONOMIC  ACTIVITIES 

The  purpose  of  our  economic  activities  is  to  satisfy  our  eco- 
nomic desires.  In  Chapter  II  the  chief  of  these  were  classified 
as  (i)  desire  for  action,  (2)  desire  for  esteem,  and  (3)  desire 
for  material  goods.  Our  economic  activities  may  be  classified 
correspondingly  as  ( i )  pleasurable  activities,  ( 2 )  activities  de- 
signed to  win  the  esteem  of  other  beings,  and  (3)  acquisitive 
activities. 

Play.  Pleasurable  activities  might  be  said  to  include  the 
whole  field  of  play,  sport,  and  recreation,  but  we  should  be  care- 
ful to  exclude  those  forms  of  amusement  or  entertainment  in 
which  most  of  us  remain  as  idle  spectators  while  others  are  paid 
to  amuse  or  entertain  us.  We  should  then  include  only  those 
activities  which  the  participants  themselves  enjoy  so  much  as 
to  require  no  other  reward  or  incentive  than  the  pleasure  of 
participation. 

Activities  designed  to  win  the  esteem  of  other  beings  include 
a  great  deal  of  our  polite  social  intercourse  and  some  of  our 
religious  ceremonialism.  Acquisitive  activities,  however,  in- 
clude most  of  our  industrial  and  business  life.  There  is  usually, 
however,  a  mixture  of  motives,  as  indicated  in  our  discussion  of 
economic  desires  in  Chapter  II. 

Pleasurable  activities  play  a  large  part  in  the  economic  life 
of  most  nations,  especially  of  those  which  are  distinguished  for 
their  energy  and  strenuosity.  Hunting  and  fishing  for  sport, 
gardening,  poultry-raising  for  pleasure,  much  literary  and  ar- 
tistic work,  and  a  number  of  other  avocations  are  carried  on  by 
persons  whose  chief  or  sole  motive  is  in  the  pleasure  of  action. 
Besides,  larger  numbers  of  people  spend  considerable  time  in 
games  and  sports  which  have  no  productive  end  beyond  the 

47 


48  PRINCIPLES  OF  NATIONAL  ECONOMY 

pleasure  of  action.  They  derive  a  considerable  part  of  the  joy 
of  living  from  these  exercises  rather  than  from  the  consumption 
of  material  goods.  As  material  wealth  increases,  through  im- 
proved and  easier  methods  of  production,  more  and  more  time 
is  spent  in  pleasurable  activities  and  less  in  activities  that  are 
purely  acquisitive. 

If  we  could  all  make  a  living  by  playing !  If  we  could 
imagine  a  condition  under  which  all  that  heart  could  desire  in 
the  way  of  material  goods  was  freely  provided,  men  would  not 
have  to  do  anything  except  what  they  liked  to  do.  There  would 
doubtless  be  much  strenuous  action,  but  it  would  take  the  form 
of  play.  However,  so  long  as  any  class  or  classes  of  material 
goods  are  scarce,  it  will  be  necessary  that  work  be  done  the 
chief  motive  of  which  is  the  desire  for  material  goods  rather 
than  the  pleasure  of  action.  This  contrast  between  doing  what 
we  enjoy  and  doing  what  is  necessary  to  provide  the  material 
necessaries  of  life  is  well  brought  out  in  the  old  fable  of  the 
grasshopper  and  the  ant.  The  grasshopper,  it  will  be  remem- 
bered, had  spent  the  summer  in  pleasurable,  the  ant  in  acquisi- 
tive, activity.  When  winter  came  the  grasshopper  learned  that 
these  acquisitive  activities  had  their  compensations  even  though 
they  may  not  be  so  very  pleasant. 

Acquisitive  activities.  Though  acquisitive  activities  all  have 
the  common  motive  of  the  desire  for  material  wealth,  they 
are,  nevertheless,  of  many  kinds,  some  being  predatory,  some 
merely  acquisitive,  and  some  productive  or  useful.  It  is  obvi- 
ous that  it  makes  a  great  deal  of  difference  to  the  prosperity  of 
the  nation  how  its  citizens  generally  acquire  their  wealth.  The 
following  outline  attempts  to  classify  the  acquisitive  activities 
of  individuals  according  as  they  subtract  from  or  add  to  the 
national  prosperity. 

Ways  of  acquiring  wealth.  In  the  diagram  on  the  following 
page  the  ways  of  acquiring  wealth  are  divided  into  two  main 
classes, — the  uneconomical  and  the  economical.  From  the 
social  or  national  point  of  view  it  is  uneconomical  to  have  men 
acquiring  wealth  by  methods  which  do  not  add  to  the  total 


ECONOMIC  ACTIVITIES 


49 


ACQUISITIVE 
ACTIVITIES 


Uneconomical^ 


Harmful 


.  Neutral 


in  land 


Econom- 
ical 


Primary  in- 
dustries 


Extractive 


War 

Piracy 
Plundering 
Robbing 
Swindling 
Counterfeiting 
Adulterating  goods 
.  Monopolizing 
f  Marrying  wealth 
I  Inheriting  wealth 
]  Benefiting   through  a  rise 
values 

Hunting 

Fishing 

Grazing 

Lumbering 

Mining 

f  Tillage 

{Agriculture  -j  Plant  breeding 
Forestry        [Animal  breeding 
Fish  culture 
f  Manufacturing 
Transporting 
Storing 
Merchandising 

f  Healing 

Teaching 
Personal  and  professional  services -j  Inspiring 

Governing 
[  Amusing  etc. 


Secondary  industries 


wealth  or  well-being  of  the  society  or  the  nation.  When  one 
man  gains  something  by  plundering,  swindling,  counterfeiting, 
or  monopolizing,  someone  else  loses  a  like  amount  and  nothing 
is  added  to  the  total.  In  fact,  if  these  harmful  methods  become 
general  they  are  likely  to  discourage  honest  industry  and  ac- 
tually to  diminish  the  total  production  of  wealth.  Even  the 
neutral  methods  may  become  harmful  if  they  result  in  wasted 
lives ;  that  is,  if  they  enable  men  and  women  who  would  other- 
wise be  productive  and  useful  to  live  in  idleness  and  luxury. 
The  smaller  the  proportion  of  the  people  who  live  by  means  of 


So  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  uneconomical  methods  the  more  prosperous  the  nation  is 
likely  to  become. 

Economical  ways  of  getting  a  living.  By  the  economical  ways 
of  acquiring  wealth  are  meant  all  those  ways  by  which  an  in- 
dividual contributes  to  the  wealth  of  the  whole  community  as 
much  as  he  gets.  He  may  make  his  contribution  by  laboring 
either  to  produce  commodities  or  to  render  direct  service  to 
some  of  his  fellow  men.  In  either  case,  where  he  gives  honest 
service  for  honest  pay  he  is  enriching  someone  else  in  propor- 
tion as  he  is  himself  enriched.  A  nation  in  which  this  rule 
prevails  universally,  where  everyone  is  contributing  to  the 
well-being  of  someone  else  in  exact  proportion  as  he  himself 
prospers,  has  at  least  one  of  the  conditions  of  general  prosperity. 
If  each  one  is  capable  and  well  trained,  so  that  he  can  give 
efficient  service  (that  is,  if  he  contributes  largely  to  the  prosper- 
ity and  well-being  of  someone  else),  then  everyone  is  prosper- 
ous, which  is  the  same  as  saying  that  the  nation  as  a  whole  is 
prosperous. 

Primary  industries.  The  economical  ways  of  getting  a  living 
are  subdivided  into  three  classes :  first,  the  primary  indus- 
tries ;  second,  the  secondary  industries ;  and,  third,  professional 
and  personal  service.  The  primary  industries  are  those  which 
produce  commodities  directly  from  their  original  and  natural 
source, — which  take  material  as  nature  provides  it  and  appro- 
priate it  to  some  human  use  or  change  it  from  a  form  which  is 
nonusable  to  a  form  which  is  either  usable  or  one  stage  nearer 
to  usableness.  For  example,  the  elements  which  produce  plant 
growth  are  not,  in  their  natural  state,  available  for  human  use. 
The  farming  industry  converts  these  elements  into  something 
which  is  either  usable,  as  in  the  case  of  fruits  and  vegetables, 
or  at  least  one  stage  on  its  way  toward  usableness,  as  in  the  case 
of  grain  or  live  stock.  The  mining  industry  brings  the  crude 
ore,  which  is  not  usable,  into  a  condition  where  it  is  either 
usable  or  at  least  one  stage  nearer  usability. 

Secondary  industries.  The  secondary  industries  are  those 
which  take  the  products  of  the  primary  industries  which  are 


ECONOMIC  ACTIVITIES  51 

in  need  of  further  modification  and  carry  them  through  the 
remaining  stages  on  their  way  to  final  usability.  The  iron  ore, 
for  example,  must  be  worked  over  many  times  before  it  be- 
comes an  automobile  or  the  blade  of  a  pocketknife.  The  coal 
must  sometimes  be  transported  long  distances  before  it  can 
warm  our  houses.  The  farmer's  grain,  besides  being  transported 
long  distances  from  places  where  there  is  a  surplus  to  other 
places  where  there  is  a  shortage,  must  also  be  stored  from 
threshing  time  until  it  is  needed  by  the  consumers,  and  it  must 
be  ground  into  flour  and  baked  into  bread  or  manufactured  into 
some  other  form  of  food  before  it  is  ready  for  use. 

Services.  Personal  and  professional  services  include  all  lines 
of  work  which  do  not  directly  produce  salable  commodities. 
Lawyers,  doctors,  preachers,  teachers,  actors,  barbers,  and  even 
policemen  and  congressmen,  besides  multitudes  of  others,  are 
performing  professional  and  personal  services.  Their  labor  has 
sometimes  been  called  unproductive  labor,  merely  on  the  ground 
that  it  does  not  produce  vendible  commodities.  Though  the 
writers  who  apply  that  term  to  them  do  not  mean  to  cast  any 
reflection  upon  them,  always  being  careful  to  state  that  "un- 
productive" does  not  mean  useless,  nevertheless  it  seems  better 
to  avoid  the  use  of  a  term  which  is  so  easily  misunderstood. 
The  important  distinction  is  not  that  between  productive  and 
unproductive  labor  but  between  the  economical  and  uneconom- 
ical ways  of  acquiring  wealth.  -Even  though  the  labor  of  the 
policeman  does  not  directly  produce  a  commodity,  as  the  labor 
of  a  shoemaker  does,  for  example,  nevertheless  the  shoemaker 
and  every  other  honest  worker  is  helped  to  work  better  by  the 
law  and  order  which  a  good  police  system  helps  to  support. 
They  are  helped  also  by  the  physician,  the  teacher,  and  others 
who  labor  in  the  field  of  direct  professional  service.  There  is 
an  ancient  story  of  some  musicians  who  formed  a  part  of  a 
captured  army.  They  requested  that  they  be  set  free  by  their 
captors,  on  the  ground  that  they  had  not  taken  part  in  the  fight- 
ing. The  captors  replied,  "  By  your  music  you  inspired  others  to 
fight ;  therefore  you  must  be  treated  as  though  you  were  your- 


52  PRINCIPLES  OF  NATIONAL  ECONOMY 

selves  fighters."  By  a  similar  line  of  reasoning  it  could  be  said 
that  if  musicians  inspire  others  to  work,  they  are  themselves 
workers  and  are  contributing  their  part  toward  the  national 
prosperity.  Any  of  these  economic  activities  may  be  carried  on 
either  competitively  or  cooperatively.  The  basis  of  competition 
is  found  in  the  conflicting  desires  of  mankind,  and  these  desires 
come  into  conflict  mainly  because  of  scarcity. 

Honorable  activities.  It  has  been  suggested  already  that 
certain  activities  may  be  both  pleasurable  and  productive.  It 
should  be  added  that  they  may  also  be  highly  honorable  and 
bring  a  great  deal  of  social  esteem  to  the  producers.  In  fact,  the 
highest  prosperity  can  never  be  achieved  by  any  nation  that 
does  not  manage  to  make  productive  action  both  pleasurable 
and  honorable.  If  the  three  classes  of  activity  are  always 
sharply  distinguished  and  never  combined,  the  nation  will  al- 
ways be  poor. 

If,  for  example,  all  genuinely  productive  work  should  be  held 
in  low  esteem  by  the  people,  and  if  their  habits  of  mind  were 
such  as  to  make  it  impossible  for  them  to  derive  any  pleasure 
from  productive  work,  they  would  always  suffer  from  a  dearth 
of  material  goods.  No  one  would  then  do  productive  work 
except  under  the  stress  of  want  or  the  motive  of  greed.  But  if 
productive  work  is  held  in  high  esteem,  and  if  the  habits  of 
mind  of  the  people  are  such  as  to  enable  them  to  derive  a  great 
deal  of  their  pleasure  from  productive  work,  it  is  certain  that  a 
great  deal  of  productive  work  will  be  done.  Men  will  not  need 
to  spend  so  much  time  in  mere  self-enjoyment,  because  they 
will  get  a  certain  amount  of  enjoyment  from  their  productive 
work ;  neither  will  they  be  tempted  to  abandon  productive  work 
in  order  to  win  esteem  or  popularity  in  other  ways.  In  short, 
they  will  have  three  motives  to  work,  instead  of  one,  and  will 
work  harder,  produce  more  goods,  win  more  esteem,  and  have 
a  better  time  in  consequence. 

Attitude  toward  work.  One  of  the  most  important  differences 
between  the  prosperous  and  the  unprosperous  nations  is  found 
in  this  attitude  toward  work.  The  unprosperous  nations  are 


ECONOMIC  ACTIVITIES  53 

generally  found  to  have  many  holidays  and  to  spend  a  great 
deal  of  their  time  and  energy  amusing  themselves  in  unproduc- 
tive ways.  It  seems  logical  to  them  to  do  so  and  illogical  to 
work  when  they  might  enjoy  themselves.  It  does  not  seem  to 
occur  to  them  that  there  can  be  such  a  thing  as  enjoying  work. 
Any  nation  that  has  ever  grown  really  prosperous  has  had,  at 
least  in  its  days  of  growth,  many  working  days  and  few  holi- 
days, has  managed  to  take  a  great  deal  of  joy  and  pride  in  work, 
and  work  has  been  held  in  high  esteem. 

Even  in  the  most  industrious  nations  there  are  always  demor- 
alizing tendencies.  One  result  of  prosperity  is  to  make  people 
desire  more  expensive  amusements  as  well  as  more  costly  goods. 
There  is  a  tendency  to  multiply  holidays,  shorten  the  working 
day,  the  working  week,  or  the  working  lifetime,  and,  in  general, 
to  turn  from  work  to  other  things  for  pleasure. 

Joy  in  work.  Why  work  longer  when  we  have  goods  enough, 
is  a  common  question.  If  one  is  so  constituted  as  to  be  unable 
to  see  that  work  may  itself  be  a  pleasure,  there  is  no  answer  that 
will  satisfy  him.  What  he  needs  is  not  argument  but  a  change 
of  heart, — a  new  outlook  on  life,  a  new  sense  of  value.  Until 
he  can  be  made  to  feel  pleasure  in  work  no  reasoning  will 
convince  him. 

Men  who  do  not  feel  pleasure  in  work  will  naturally,  as  soon 
as  they  are  prosperous  enough,  work  less  and  spend  more  time 
in  pleasurable  but  nonproductive  activities.  Having  builded 
their  barns  larger  and  filled  them  with  good  things,  they  will 
say,  "Soul,  thou  hast  much  goods  laid  up  for  many  years; 
take  thine  ease,  eat,  drink,  and  be  merry";  that  is,  they  will 
lose  their  souls.  But  men  who  can  and  do  take  pleasure  in  their 
work  behave  in  a  very  different  way.  It  makes  a  vast  difference 
in  the  prosperity  of  a  nation  whether  its  citizens  generally 
behave  in  the  one  way  or  the  other.  If  they  generally  stop 
producing  as  soon  as  they  have  their  barns  full,  the  pros- 
perity of  the  country  is  limited  by  that  fact;  but  there  is  no 
conceivable  limit  to  the  prosperity  of  a  people  who  enjoy 
their  work. 


54  PRINCIPLES  OF  NATIONAL  ECONOMY 

Preferring  the  other  man's  work.  Another  demoralizing  tend- 
ency is  that  of  disliking  one's  own  work  and  imagining  that 
some  other  kind  of  work  would  be  much  pleasanter.  They  who 
have  to  do  work  requiring  great  discretion  sometimes  grow 
weary  of  thinking  perpetually  about  one  puzzling  question  after 
another  and  imagine  that  they  would  enjoy  routine  work  that 
did  not  require  much  thinking,  while  those  who  grow  weary  of 
routine  work  imagine  that  they  would  enjoy  work  that  required 
hard  thinking.  They  who  have  to  carry  heavy  responsibilities 
imagine  that  they  would  enjoy  work  that  involved  no  responsi- 
bility, while  those  who  carry  little  responsibility  long  for  more. 
Sentimentalists  sometimes  excuse  themselves  and  others  for 
disliking  their  work  by  contrasting  it  with  what  they  style 
creative  work.  This  term  has  never  been  satisfactorily  defined 
and  probably  means  little  more  than  pleasant  work,  and  to 
use  it  in  this  sense  is  to  beg  the  question.  All  productive  work 
is  creative  in  the  best  sense. 

Quite  as  demoralizing  as  the  tendency  to  separate  all  work 
from  all  pleasure,  or  to  regard  all  work  as  irksome  rather  than 
pleasant,  is  the  tendency  to  separate  estimable  from  productive 
work.  This  tendency  shows  itself  wherever  productive  effort 
is  held  in  low  esteem  and  other  activities  in  high  esteem.  There 
have  been  men  who  have  won  a  certain  kind  of  applause  by 
boasting  that  what  they  were  doing  was  of  no  use  to  anybody. 
It  is  not  uncommon  to  speak  disparagingly  of  mere  business  or 
industry  as  contrasted  with  some  of  the  ornamental  callings, 
and  of  those  who  produce  the  goods  which  we  like  to  consume 
as  mere  Philistines.  With  the  best  of  intentions,  even  certain 
kinds  of  highly  useful  work  are  sometimes  called  social  service 
to  distinguish  them  from  other  kinds  of  useful  work,  to  the 
disparagement  of  the  latter.  Some  kinds  of  work  may  be  more 
productive  than  others,  but  all  productive  work  is  social  service, 
and  there  ought  not  to  be  any  such  distinction. 

Social  service.  Probably  the  highest  form  of  social  service 
is  found  in  the  ordinary  productive  business  enterprise,  though 
it  is  not,  of  course,  the  only  form.  If  we  assume  that  people 


ECONOMIC  ACTIVITIES 


55 


know  what  they  need,  it  is  seldom  necessary  to  call  upon  philan- 
thropy to  provide  for  their  needs.  Business  or  politics  will 
supply  them  quite  as  effectively  as  philanthropy  possibly  could. 
In  those  cases,  however,  where  people  do  not  know  their  own 
needs  neither  business  nor  politics  will  supply  them,  for  the  rea- 
son that  people  will  neither  pay  the  business  man  nor  vote  for 
the  politician  who  attempts  to  supply  them ;  nor  will  they  show 
esteem  for  the  person  who  tries  to  do  for  them  that  which  they 
do  not  desire  to  have  done.  If  such  needs  are  supplied  at  all, 
they  must  be  supplied  on  a  philanthropic  basis  by  people  who 
do  not  expect  either  money,  votes,  or  social  esteem  for  their 
work. 

The  following  outline  will  show  with  a  fair  degree  of  clear- 
ness the  dividing  line  between  philanthropic  service  and 
nonphilanthropic  service. 

In  which  the  people's  de-  (  Desires,  supplied  bv-i 

'  \  Politics 
sires    are    opposed    to  J 

their  needs  '  Needs'    supplied    by    philanthropy, 


THE  FIELD 

OF 
SERVICE 


[      there  being  no  effective  demand 


In    which    the    peo-  f 


!  „     .  f  Business 


pie's    desires     are  i  Desires     Both  sup-    '. 

.1.  •  i  XT    j      r       i-  j  if  1  Politics 
the  same  as  their     Needs          plied  by  , 

^Philanthropy 


needs 


I  J 


Philanthropic  service.  If  people  do  not  know  what  they 
really  need,  and  you  happen  to  know  better  than  they,  you  will 
have  two  widely  different  opportunities  before  you — one  in  the 
field  of  business  or  politics  and  the  other  in  the  field  of  philan- 
thropy. On  the  one  hand,  you  may  look  at  the  problem  as  a 
business  man  or  a  politician  would.  You  discover  that  the 
people  have  certain  desires  for  which  they  demand  the  means 
of  satisfaction.  As  a  business  man  or  a  politician  you  need 
not  inquire  whether  they  ought  to  have  the  things  they  desire 
or  not.  You  will  realize  that  they  will  pay  for  these  things  or 
that  they  will  vote  for  the  politician  who  supplies  them,  even 
though  they  receive  harm  from  what  they  get.  On  the  other 
hand,  you  may  approach  the  problem  as  a  philanthropist  and 


56  PRINCIPLES  OF  NATIONAL  ECONOMY 

attempt  to  give  the  people  what  they  really  need  rather  than 
what  they  desire.  The  people  will  not  pay  you  for  your  service, 
they  may  even  resent  it;  nevertheless  you  will  be  rendering 
them  a  real  service. 

Nonphilanthropic  service.  If,  however,  the  people  really 
know  what  they  need  (that  is,  if  their  desires  are  the  same  as 
their  needs),  then  it  will  not  make  much  difference  whether 
you  are  a  business  man,  a  politician,  or  a  philanthropist ;  you 
will  do  much  the  same  thing  in  either  case.  Since  they  desire 
what  they  need,  you  can  prosper  as  a  business  man  by  supplying 
their  needs.  You  can  prosper  as  a  politician  also,  but  in  either 
case  you  will  do  the  same  for  the  people  that  you  would  if 
you  were  a  philanthropist  and  cared  nothing  for  either  money 
or  votes  and  were  actuated  solely  by  good-will  and  benevolence. 

The  large  principle  involved  here  is  simply  that  when  people 
know  what  they  need,  business  and  politics,  as  well  as  philan- 
thropy, may  supply  those  needs.  When,  however,  their  needs 
are  opposed  to  their  desires,  business  and  politics  are  both  very 
different  from  philanthropy.  In  this  case  neither  business  nor 
politics  can  properly  be  called  social  service,  only  philanthropy 
is  really  and  genuinely  serviceable.  Generally  speaking,  how- 
ever, it  is  probable  that  men  can  be  trusted  to  know  their  own 
needs.  In  so  far  as  this  is  true,  business  and  politics  are  just 
as  serviceable  as  philanthropy  and  deserve  quite  as  well  the 
name  of  social  service  as  any  kind  of  philanthropy. 

Where  men  know  their  own  needs.  Let  us  consider  rather 
carefully  the  field  of  service  wherein  needs  and  desires  coincide. 
This  is  the  field  of  worthy  business  enterprise  and  of  construc- 
tive politics.  In  this  field  the  selfish  business  man  and  politi- 
cian will  do  very  much  the  same  things  that  a  philanthropist 
would  do,  the  only  difference  being  that  the  business  man  or 
the  politician  may  accept  a  reward  in  the  form  of  money  or 
votes,  whereas  the  philanthropist  would  not. 

Suppose  you  are  a  pure  philanthropist  with  no  selfish  mo- 
tive whatsoever  and  are  looking  about  for  an  opportunity  to 
be  of  service  to  your  fellow  men,  but  you  have  chosen  some 


ECONOMIC  ACTIVITIES  57 

form  of  service  which  consists  in  supplying  needs  of  which  the 
people  are  fully  conscious  and  appreciative.  The  market  de- 
mand will  be  a  pretty  good  indication  as  to  what  people  need. 
It  will  indicate  where  the  most  pressing  need  is  and  where 
there  is  the  greatest  scarcity  of  service.  As  a  philanthropist, 
you  should  seek  to  perform  some  service  of  which  there  is  a 
pressing  need  because  of  its  scarcity,  rather  than  to  perform 
some  service  for  which  there  is  no  pressing  need  because  of  its 
abundance.  If  you  find,  for  example,  that  the  supply  of 
farmers,  relative  to  the  demand,  is  small,  and  that  the  supply 
of  servants  in  any  other  field  which  you  are  capable  of  enter- 
ing is  pretty  well  supplied  already  (is  large),  it  would  then  be 
your  duty  as  a  philanthropist  to  become  a  farmer  rather  than 
to  enter  one  of  the  other  occupations.  If,  having  become  a 
farmer,  you  find  that  certain  crops  are  already  well  supplied, 
so  well  supplied  that  there  is  no  pressing  need  for  a  larger 
supply,  but  that  there  is  one  crop  which  is  undersupplied,  so 
much  so  that  there  is  a  pressing  need  for  more,  as  a  philanthro- 
pist you  should  grow  this  crop  which  is  scarce.  It  will  be 
noticed,  however,  that  in  making  these  two  choices  you  will 
be  choosing  exactly  as  a  business  man  would  who  was  seeking, 
not  philanthropy,  but  profit. 

Where  men  are  most  needed.  Again,  if  you  were  to  decide 
to  go  into  a  highly  organized  industry  which  required  a  great 
many  different  kinds  of  skill  or  talent,  ranging  all  the  way  from 
unskilled  muscular  labor  up  to  the  higher  forms  of  business 
management,  you  would  have  a  new  problem, — that  of  choos- 
ing the  kind  of  work  which  you  would  do  or  the  kind  of  skill 
which  you  would  develop.  If  you  had  it  in  your  power  to  do 
any  of  the  many  kinds  of  work  required,  you  would,  as  a 
philanthropist,  choose  the  one  in  which  men  were  most  scarce 
rather  than  any  kind  of  work  for  which  there  were  already 
plenty  of  men.  Or,  if  your  talents  were  such  as  to  enable 
you  to  choose  among  any  two  or  three  kinds  of  work,  you 
would  have  to  choose  in  the  same  way.  As  a  philanthropist 
you  would  have  to  enter  on  that  occupation  in  which  there 


58  PRINCIPLES  OF  NATIONAL  ECONOMY 

was  the  most  pressing  need  for  more  men.  In  this  case,  how- 
ever, your  choice  as  a  philanthropist  would  be  identical  with 
your  choice  if  you  were  not  a  philanthropist  but  were  looking 
for  the  highest  possible  wages  or  salary. 

If,  however,  you  made  a  different  choice,  you  would  not  be  a 
good  social  servant,  or  you  would  not  be  performing  your  maxi- 
mum social  service.  If  there  is  one  kind  of  work  for  which 
there  are  already  a  great  many  men  available,  the  question  of 
one  man  more  or  less  in  that  occupation  would  make  very  little 
difference.  Your  contribution  to  the  total  production  would  be 
very  slight  if  you  crowded  into  that  already  overcrowded  occu- 
pation; in  fact,  your  contribution  might  be  nil,  because  you 
might  merely  crowd  out  another  man.  Your  only  opportunity 
for  genuine  service  would  be  to  find  an  occupation  so  under- 
crowded  as  to  make  it  very  important  that  more  men  should 
enter  it.  If  you  enter  such  an  occupation,  you  will  be  doing 
vastly  more  for  the  community  or  for  the  industry  than  if  you 
enter  an  occupation  where  you  are  not  very  much  needed  be- 
cause of  the  existing  oversupply  of  labor. 

Even  after  you  have  decided  to  enter  an  occupation  where 
you  are  very  much  needed,  you  still  have  another  problem 
before  you.  Will  you  contribute  your  services  gratuitously  or 
will  you  accept  the  high  wages  offered  ?  Even  as  a  philanthro- 
pist it  is  by  no  means  certain  that  you  should  work  gratuitously. 
It  is  quite  possible  that  you  could  do  more  good  by  accepting 
the  high  wages  and  using  the  money  in  some  other  way  than  by 
working  gratuitously.  On  the  whole,  it  would  probably  be  a 
safer  kind  of  philanthropy  for  you  to  accept  whatever  wages 
your  work  would  bring  and  then  use  your  money  constructively. 

To  invest  or  to  give,  that  is  the  question.  But  even  after  you 
have  accepted  your  wages  you  have  money  to  spend  construc- 
tively ;  you  still  have  other  serious  problems.  As  a  philanthro- 
pist you  can  doubtless  do  some  good  by  spending  your  money 
charitably,  but  that  is  not  the  only  way  in  which  to  do  good 
with  money.  It  may  be,  and  frequently  is,  better  to  invest  your 
money  in  some  new  industry  than  to  give  it  away  in  charity. 


ECONOMIC  ACTIVITIES  59 

If  by  investing  it  in  a  new  industry  you  can  build  or  help  to 
build  a  new  factory  which  will  employ  a  number  of  men,  it  is- 
probably  better  for  those  men  to  be  so  employed  than  to  receive 
the  money  as  a  gift.  Besides,  when  they  are  so  employed,  they 
will  be  producing  more  goods  for  the  rest  of  the  country  and 
tending  to  make  the  country  more  prosperous.  The  only  condi- 
tions under  which  it  would  be  advantageous  to  give  your  money 
away  charitably  would  be  when  it  would  take  care  of  people 
not  capable  of  working  in  your  factory  or  any  other  factory, 
or  doing  any  other  kind  of  productive  work.  So  long  as  there 
are  such  people  in  the  world  they  will  have  to  be  taken  care  of, 
and  there  is  room  for  charitable  giving;  but  for  able-bodied 
people,  capable  of  working,  it  is  much  better  for  them  that  they 
be  employed  in  some  kind  of  productive  work,  and  very  much 
better  for  the  rest  of  the  world  at  the  same  time. 

Because  of  the  great  fact  of  scarcity,  it  is  absolutely  certain 
that  human  interests  and  desires  will  frequently  come  in  con- 
flict. When  there  is  not  enough  of  a  certain  thing  to  go  around 
and  satisfy  everybody,  it  means  that  if  one  person  gets  all  he 
wants  others  must  necessarily  get  less  than  they  want.  This 
conflict  of  interests  will  give  rise  to  some  kind  of  rivalry, 
struggle,  or  competition.  What  form  this  struggle  will  take  will 
depend  a  great  deal  upon  the  laws  and  regulations  of  the  coun- 
try and  the  moral  and  religious  development  of  the  people. 
The  outline  on  page  60  indicates  the  chief  forms  of  struggle  or 
of  the  acquisitive  activities. 

The  struggle  for  existence.  It  is  a  common  error  to  speak 
of  competition  as  though  it  were  synonymous  with  war  or  with 
the  struggle  for  existence  as  it  is  carried  on  among  brutes. 
That  it  is  a  form  of  conflict  there  can  be  no  doubt,  nor  can  it 
be  denied  that  it  is  a  phase  of  the  all-but-universal  struggle  for 
existence.  But  there  are  many  forms  of  conflict  besides  war, 
and  there  are  many  ways  of  struggling  for  existence  without 
resorting  to  the  destructive  methods  of  brutes. 

Various  forms  of  conflict.  The  methods  named  in  the  out- 
line on  page  60  may  be  explained  and  illustrated  as  follows :  By 


6o 


PRINCIPLES  OF  NATIONAL  ECONOMY 


METHODS  OF 
STRUGGLING 

FOR 
EXISTENCE 


I  War 
Robbery 
Dueling 
Sabotage 
Brawling 
{Thieving 
Swindling 
...         .         ,         , 
Adulteration  of  goods 

^  False  advertising 

f  Courting  for  royal  favors 
Political^  Courting  the  sovereign  people 
I  Campaigning  for  office 

f  Polite  social  intercourse 
ErotuH  „ 
Persuasive -(  I  Courting 

,  f  Advertising 
Commercial  •(  „  .  ,  . 

I.  Salesmanship 

f"  Leaving  it  to  the  crowd  " 
^  t.  Litigation  before  courts 

Productive  j  Rivalry  in  ProdudnS  Soods 
I  Rivalry  in  rendering  service 


destructive  methods  are  meant  all  those  whereby  one  succeeds 
by  virtue  of  one's  power  to  kill,  to  hurt,  or  to  inspire  fear  of 
physical  injury  or  pain.  "War,"  "robbery,"  "dueling,"  "sa- 
botage," and  "brawling"  are  names  for  methods  of  destruction 
as  carried  on  by  human  beings;  but  it  must  be  remembered 
that  animals  also  kill,  rob,  inflict  injury,  and  inspire  terror.  By 
the  deceptive  methods  are  meant  all  those  by  which  one  suc- 
ceeds by  virtue  of  one's  power  to  deceive,  to  swindle,  or  to 
cheat.  Animals  practice  deceit,  though  we  do  not  call  their 
forms  of  deceit  by  such  names  as  "swindling,"  "counterfeit- 
ing," "adulteration  of  goods,"  etc.  By  the  persuasive  methods 
are  meant  all  those  methods  whereby  one  succeeds  by  virtue  of 
one's  power  to  persuade  or  to  convince.  One  may  beat  one's 
rival  by  being  a  more  persuasive  talker,  whether  one  is  striving 
for  favors  from  the  sovereign  person  or  from  the  sovereign 
people,  whether  one  is  striving  for  the  hand  of  a  lady,  the  deci- 
sion of  a  jury,  or  the  trade  of  a  possible  customer.  This  form 
of  conflict  would  remain  even  if  we  could  eliminate  all  other 


ECONOMIC  ACTIVITIES  61 

forms.  Even  under  the  most  complete  form  of  communism 
there  would  remain  abundant  room  for  the  persuasive  forms 
of  conflict.  By  the  productive  methods  are  meant  all  those 
methods  whereby  one  may  beat  one's  rivals,  or  gain  advantages, 
by  virtue  of  one's  power  to  produce,  to  serve,  or  to  confer 
benefit. 

The  same  persons  may  resort  to  more  than  one  of  these 
methods  in  order  to  gain  an  advantage.  When  two  farmers 
compete  in  growing  crops  they  are  struggling  for  existence,  or 
for  economic  advantage,  by  a  productive  method.  When  they 
quarrel  over  a  line  fence  and  take  their  quarrel  before  a  court 
for  adjudication,  they  are  struggling  by  a  persuasive  method. 
When  they  secretly  alter  or  remove  landmarks  in  order  to  gain 
an  advantage  in  their  litigation  or  when  they  bribe  jurors,  they 
are  struggling  by  a  deceptive  method.  When  they  fall  to  fight- 
ing either  with  fists  or  with  weapons,  they  are  struggling  by  a 
destructive  method.  When  they  change  their  methods  in  the 
order  just  described,  they  are  sinking  lower  and  lower  in  the 
scale ;  that  is,  they  are  resorting  to  worse  and  worse  methods 
of  struggling  for  existence  or  advantage.  When  they  rival  one 
another  in  growing  corn,  there  is  more  corn  grown  as  the  result 
of  that  rivalry ;  the  country  is  better  fed  and  everyone  is  better 
off,  except  possibly  the  one  who  is  beaten,  and  even  he  may 
very  likely  be  better  off  than  he  would  have  been  if  he  had  not 
competed  at  all.  When  two  farmers  quarrel  over  a  line  fence 
and  take  the  case  into  court,  no  one  gains  any  benefit  except  the 
lawyers,  and  what  the  lawyers  gain  the  litigants  lose.  No  new 
land  is  created  by  that  conflict.  No  new  wealth  is  produced. 
The  community  is  no  better  fed,  and  the  litigants  have  wasted 
their  time.  To  change  from  persuasion  to  deception  or  from 
deception  to  physical  force  is  so  clearly  to  sink  to  a  lower  level 
that  it  is  unnecessary  to  pursue  the  topic  further. 

Destructive  and  deceptive  methods  of  brutes.  It  will  be  ap- 
parent to  anyone  who  will  study  the  diagram  that  among 
animals  the  destructive  and  deceptive  methods  are  the  charac- 
teristic forms  of  struggle.  They  kill,  maim,  injure,  rob,  and 


62  PRINCIPLES  OF  NATIONAL  ECONOMY 

deceive  one  another  with  no  moral  or  legal  restraints.  They 
may  sometimes  rise  to  the  level  of  persuasion,  as  in  the  courting 
process,  but  never  to  the  level  of  production;  that  is,  no  animal 
ever  tries  to  beat  its  rival  by  producing  a  larger  or  better  prod- 
uct or  rendering  a  greater  or  better  service.  Among  human 
beings  who  have  no  moral  sense  and  who  are  unrestrained  by 
law  and  justice  the  destructive  and  deceptive  methods  of  strug- 
gle will  be  followed  as  well  as  the  persuasive  and  productive 
methods,  but  the  destructive  and  deceptive  methods  of  struggle 
are  precisely  the  things  that  morals  and  laws  are  designed  to 
prevent.  In  any  civilization  worthy  of  the  name  and  under 
any  government  worthy  to  stand  overnight  men  are  actually 
restrained,  by  their  own  moral  feelings,  by  the  respect  for  the 
good  opinions  of  their  fellows,  and  by  the  fear  of  legal  penal- 
ties, from  attempting  to  promote  their  own  interests  by  destruc- 
tion or  deception. 

Meaning  of  crime.  To  say  that  men  are  restrained  from 
doing  these  things  is  not  the  same  as  to  say  that  they  are 
absolutely  prevented.  "Crime"  is  the  name  we  give  to  destruc- 
tive and  deceptive  methods  of  struggling,  and  it  still  flourishes, 
but  it  must  be  remembered  that  what  we  call  crimes  for  human 
beings  are  not  crimes  for  brutes,  for  the  simple  reason  that 
brutes  have  none  of  those  restraints  which  men  throw  around 
themselves.  The  fact  that  we  call  all  destructive  methods  and 
the  more  grossly  deceptive  methods  crimes  and  impose  penalties 
against  them  shows  that  we  are  trying  to  raise  the  struggle  for 
existence  to  a  higher  plane  than  that  on  which  it  is  waged  in 
the  subhuman  world.  The  aim  is  to  prevent  destruction  and 
deception  and  to  compel  men  to  succeed,  if  they  succeed  at  all, 
by  persuasion  and  production.  No  government,  however,  is  so 
efficient  that  it  can  prevent  all  destruction  or  deception.  "The 
mills  of  man  grind  slowly  and  they  grind  exceeding  coarse" 
Besides,  there  are  some  more  or  less  refined  methods  of  decep- 
tion which  have  not  even  been  declared  illegal  by  legislation. 
If  we  can  so  improve  our  legislation  as  to  prohibit  every  form  of 
deception  as  well  as  destruction,  and  if  we  can  so  improve  our 


ECONOMIC  ACTIVITIES  63 

executive  and  judicial  systems  as  to  prevent  absolutely  the 
violation  of  law,  we  shall  have  reached  the  ideal  of  govern- 
ment control  over  the  struggle  for  existence.  To  stop  produc- 
tive competition  and  compel  us  all  to  struggle  for  our  own 
advantage  by  the  persuasive  methods  would  be  a  distinct  step 
backward. 

Is  it  wrong  to  compete  ?  There  are  a  few  people  who  object 
on  principle  to  all  forms  of  competition, — who  believe  that  the 
whole  competitive  system  is  morally  wrong.  This  feeling,  how- 
ever, is  probably  due  to  a  failure  to  discriminate,  as  we  have 
tried  to  do  in  the  preceding  pages,  between  different  kinds  of 
conflict.  The  horrors  of  war  and  other  forms  of  destructive 
conflict,  the  petty,  skulking  meanness  which  accompanies  all 
forms  of  deceptive  conflict,  and  even  the  jealousies  and  heart- 
burnings which  result  from  many  forms  of  persuasive  conflict 
have  so  impressed  certain  sensitive  spirits  as  to  cause  them  to 
revolt  against  the  very  idea  of  competition  in  any  form.  Such 
people  ought  never  to  play  croquet,  because  there  is  competi- 
tion even  there.  An  election  is  as  truly  competitive  as  any 
form  of  business. 

Universality  of  struggle.  During  the  entire  life  of  man  on 
this  planet  he  has  had  to  struggle  in  one  way  or  another.  The 
reason  why  we  are  here  today  is  because  our  ancestors  were 
successful  in  their  struggles.  They  succeeded  in  living  and 
reproducing  their  kind  in  spite  of  all  the  enemies  and  dangers 
which  surrounded  them.  One  reason  why  they  struggled  so  suc- 
cessfully was  that  they  were  valiant  enough  to  wage  their  fight 
with  vigor  and  with  spirit.  That  spirit  we  have  inherited  to 
such  an  extent  that  we  cannot  even  amuse  ourselves  without 
some  kind  of  competition  or  struggle.  It  is  as  the  breath  of 
life  to  our  nostrils.  It  will  be  well  for  us  if  we  can  harness  this 
spirit  to  productive  work  rather  than  allow  it  to  waste  itself 
in  destruction,  deception,  or  even  in  some  fruitless  kinds  of 
persuasion.  The  nation  which  succeeds  best  in  so  harnessing 
this  spirit  to  production  is  the  nation  which  should  normally 
grow  rapidly  in  wealth,  prosperity,  and  power. 


64  PRINCIPLES  OF  NATIONAL  ECONOMY 

Again,  the  great  fact  of  scarcity,  together  with  the  fact, 
pointed  out  in  Chapter  II,  that  we  all  prefer  some  people  to 
others,  makes  some  form  of  competition  inevitable  and  eternal. 
As  pointed  out  in  Chapter  II,  when  there  is  not  enough  of  a 
certain  thing  to  go  around  and  satisfy  everybody,  all  those  who 
prefer  themselves  and  their  own  families  to  their  rivals  and 
their  families  will  struggle  to  get  their  share  of  the  scarce  arti- 
cle. When  there  are  not  enough  to  the  high  offices  to  go  around 
there  will  be  a  similar  struggle  to  get  them.  These  facts  have 
always  been  present  in  human  society  and  always  must  remain, 
from  the  very  nature  of  man  and  of  the  universe  in  which  he 
finds  himself.  From  the  very  nature  of  the  case  we  cannot  all 
be  leaders.  If  we  were  there  would  be  no  followers.  We  would 
all  rather  lead  than  follow;  we  would  rather  command  than 
obey.  Therefore  we  shall  always  struggle  for  leadership  and 
command.  Nor  can  there  be  wealth  enough  to  go  around  and 
satisfy  everyone.  If  there  were,  wealth  would  cease  to  exist  as 
wealth.  Whenever  you  find  a  thing  so  abundant  as  that,  it  has 
ceased  to  count  as  wealth.  Only  those  things  are  wealth  of 
which  we  can  say  that  more  is  better  than  less.  So  long  as  we 
would  rather  have  more  of  a  certain  article  than  less  of  it  we 
shall  strive  to  get  more.  Competition,  or  struggle,  is  therefore 
unavoidable.  The  thing  to  do  is  to  make  the  most  of  it  and 
to  turn  it,  so  far  as  possible,  into  productive  channels  and  out 
of  the  destructive  and  deceptive  channels. 

The  spirit  in  which  one  competes.  In  assuming  the  univer- 
sality and  permanence  of  competition  in  some  form  it  is  not 
necessary  to  exclude  such  things  as  love,  friendship,  neighbor- 
liness,  and  cooperation.  Competitors  in  a  friendly  game  may 
be  none  the  less  friendly  because  they  are  competing.  It  is  only 
when  they  care  more  for  victory  or  the  prize  of  victory  than 
they  do  for  friendship  that  there  is  any  conflict  between  compe- 
tition and  friendship.  The  cure  for  this,  however,  is  not  the 
abolition  of  competition  but  the  learning  to  care  for  the  right 
things  and  to  evaluate  things  properly.  When  men  care  more 
for  money,  which  is  the  prize  of  economic  competition,  than  for 


ECONOMIC  ACTIVITIES  65 

honor,  friendship,  or  justice,  then  competition  is  likely  to  be 
ruthless  and  destructive.  When  men  care  more  for  offices,  the 
immediate  prizes  of  political  competition,  than  for  the  welfare 
of  the  country  or  the  peace  of  the  neighborhood,  a  political  cam- 
paign is  likely  to  become  a  ruthless  and  destructive  game.  And 
when  football  men  care  more  for  victory  than  for  sport  or 
honor,  football  becomes  a  game  unfit  for  gentlemen.  In  all 
these  cases  the  evil  does  not  inhere  in  competition  itself  but  in 
the  false  system  of  valuations  in  the  minds  of  the  competitors. 
So  long  as  business  men  realize  that  there  are  other  things  more 
precious  than  money,  so  long  as  politicians  realize  that  there  are 
other  things  more  important  than  winning  offices,  so  long  as 
football  men  realize  that  there  are  other  things  greater  than 
victory,  all  these  forms  of  competition  are  thoroughly  com- 
patible with  the  most  sincere  friendship. 

It  has  been  pointed  out  many  times  that  the  struggle  for 
the  life  of  others  is  just  as  real  a  fact  in  life  as  the  struggle  for 
the  life  of  self,  that  mutual  aid  is  as  real  as  mutual  antagonism, 
and  that  cooperation  has  a  place  in  our  economic  system  as  well 
as  competition.  All  this  is  true,  but  it  must  not.be  allowed 
to  obscure  the  fact  that  competition  is  a  very  real  thing  also. 
Behind  these  apparent  contradictions  lies  the  very  important 
fact  that  human  interests  are  sometimes  harmonious  and  some- 
times antagonistic, — that  they  are  never  wholly  one  or  the 
other.  Where  the  interests  of  men  harmonize  there  is  and 
always  will  be  cooperation,  provided  they  are  wise  enough  to 
understand  it;  where  their  interests  conflict,  there  is  and  always 
will  be  competition. 

Cooperation  a  form  of  competition.  Even  cooperation,  as 
it  is  generally  practiced,  is  only  a  method  of  competing  more 
effectively.  There  is  cooperation  among  the  members  of  an 
athletic  team.  Their  teamwork  consists  in  working  together 
smoothly  and  effectively;  but  the  purpose  of  this  teamwork, 
or  cooperation,  is  to  enable  them  to  compete  more  effectively 
against  the  opposing  team.  It  would  be  difficult  to  find  or  to 
name  an  instance  of  cooperation  which  did  not,  directly  or 


66  PRINCIPLES  OF  NATIONAL  ECONOMY 

indirectly,  enable  the  cooperators  to  compete  more  successfully 
than  they  were  able  to  do  when  working  alone  as  individuals. 
It  is  really  the  principle  of  teamwork  applied  to  business  com- 
petition. Within  the  cooperating  group,  as  within  the  athletic 
team,  competition  among  members  is  reduced.  But  competi- 
tion between  cooperating  groups,  or  between  the  group  and 
those  outside  the  group,  is  quite  as  sharp  as  it  would  be  if  there 
were  no  cooperative  groups.  Again,  when  a  cooperative  group 
becomes  large,  there  arises  within  the  group  a  certain  amount 
of  competition  for  offices  and  other  advantages. 

Cooperation  is  an  excellent  thing  under  certain  conditions, 
and  wherever  the  conditions  call  for  it  every  reasonable  effort 
should  be  made  to  encourage  it,  but  the  encouragement  should 
be  given  with  a  full  understanding  of  its  limitations  and  of  its 
real  relation  to  the  competitive  process.  More  cooperative 
societies  have  failed  than  have  succeeded.  One  of  the  prin- 
cipal reasons  for  failure  has  been  that  the  promoters  have 
imagined  that  there  was  in  cooperation  something  inherently 
superior  to  competition  and  that  it  ought  to  be  substituted  for 
competition  anywhere  and  everywhere.  The  truth  seems  to 
be  that  cooperation  is  called  for  only  under  certain  special 
conditions  where  teamwork  is  required  in  order  to  secure 
large  results. 

Where  cooperation  is  successful.  A  careful  study  of  cooper- 
ation will  show  that  it  has  seldom  succeeded  in  the  field  of 
production.  Its  chief  successes  have  been  achieved  in  mer- 
chandising; that  is,  in  buying  and  selling.  Except  among  a 
few  religious  societies,  which  are  held  together  by  a  powerful 
religious  sentiment,  the  author  does  not  know  of  a  single  case 
where  cooperative  farming  has  succeeded.  By  cooperative 
farming  is  meant  the  running  of  the  productive  work  of  grow- 
ing crops  under  a  cooperative  system.  There  are  many  cases, 
however,  in  which  groups  of  farmers  have  cooperated  in  buying 
and  selling,  in  marketing  their  products,  in  purchasing  their 
supplies,  and  in  securing  capital  on  advantageous  terms.  There 
are  also  many  cases  in  which  they  have  cooperated  in  running 


ECONOMIC  ACTIVITIES  67 

creameries,  cheese  factories,  and  grain  elevators.  These  are 
parts  of  their  marketing  system.  Again,  it  must  be  remembered 
that  the  farmers  do  not  themselves  operate  these  establish- 
ments. They  own  them  and  they  furnish  the  capital  to  run 
them,  but  they  hire  others  to  manage  them  and  to  do  the  work. 
The  men  who  work  in  these  establishments  are  not  cooperators, 
but  receive  wages  and  salaries  precisely  as  they  would  if  the 
establishments  were  owned  by  private  individuals. 

Two  fields  for  business  competition.  There  is  a  fundamental 
reason  why  cooperative  enterprises  have  not  flourished  in  the 
field  of  production  as  often  as  they  have  in  the  field  of  buying 
and  selling.  This  reason  is  found  in  the  two  kinds  of  business 
competition, — competitive  production  and  competitive  bar- 
gaining. Competitive  production  always  works  well ;  competi- 
tive bargaining  sometimes  works  well  and  sometimes  works 
badly.  Since  competitive  production  always  works  well,  the 
need  for  cooperative  production  is  never  sufficient  to  justify  its 
existence.  No  one  has  a  sufficiently  strong  motive  to  induce 
him  to  give  his  time  and  energy  to  the  running  of  a  cooperative 
society  in  the  field  of  production.  Since  there  are  no  evils  con- 
nected with  competitive  production,  there  is  not  enough  to  be 
gained  by  cooperative  production  to  lead  anyone  to  sacrifice  his 
time  and  effort  in  order  to  make  it  succeed. 

In  the  field  of  competitive  bargaining,  however,  evils  fre- 
quently spring  up.  Where  a  small  and  compact  body  of  deal- 
ers are  buying  from  a  large  and  widely  scattered  body  of 
producers,  the  latter  are  at  a  great  disadvantage  in  the  bargain- 
ing process.  Where  this  is  the  case  it  is  necessary  for  the  pro- 
ducers to  get  together  in  a  cooperative  organization  in  order  to 
bargain  on  equal  terms  with  the  dealers.  Where  there  is  such 
a  need  as  this  someone  will  have  a  motive  that  is  sufficiently 
strong  to  induce  him  to  give  his  time  and  attention,  to  sit  up 
nights,  to  labor  in  season  and  out  of  season,  to  keep  the 
cooperative  society  together  and  make  it  succeed.  Without 
some  such  motive  as  this,  cooperation  has  seldom  or  never 
succeeded. 


68  PRINCIPLES  OF  NATIONAL  ECONOMY 

Competitive  consumption.  There  is  another  kind  of  com- 
petition which  always  works  badly.  It  is  even  worse  than 
competitive  bargaining.  It  may  be  called  competitive  con- 
sumption. By  competitive  consumption  is  meant  a  rivalry  in 
display,  in  ostentation,  in  the  effort  to  outshine  or  to  outdress 
all  one's  neighbors,  or  at  least  not  to  be  outshone  or  outdressed 
by  them.  This  is  not  business  competition,  however,  though  it 
can  be  called  a  kind  of  economic  competition. 

From  what  has  been  said  it  will  appear  that  economic  com- 
petition is  not  synonymous  with  the  productive  methods  of 
struggling  for  existence  as  outlined  in  the  beginning  of  this 
chapter.  There  is  such  a  thing,  it  is  true,  as  competitive  pro- 
duction ;  but  competitive  bargaining  is  partly  persuasive  and 
partly  deceptive.  It  is  persuasive  when  it  takes  the  form  of 
clever  advertising,  of  expert  salesmanship,  or  of  shrewd  and 
reasonably  honest  bargaining ;  it  is  deceptive  when  cleverness 
in  advertising  takes  the  form  of  artistic  lying  (of  overstating 
the  merits  of  an  article  advertised)  or  when  expert  salesman- 
ship takes  the  same  form.  Competitive  consumption  has  no  pro- 
ductive features  about  it.  The  effort  to  keep  up  appearances, 
to  dress  better  than  one  can  afford,  to  spend  money  for  pur- 
poses of  display,  are  all  deceptive,  besides  being  wasteful  and 
to  that  extent  destructive.  These,  however,  are  among  the  more 
refined  and  less  repulsive  forms  of  destruction.  For  this  rea- 
son, perhaps,  neither  law  nor  public  sentiment  has  condemned 
them  very  definitely  as  yet. 

In  what  fields  cooperation  may  succeed.  They  who  are  in- 
terested in  promoting  cooperation  should  bear  all  this  in  mind. 
It  is  a  waste  of  time  and  energy  to  try  to  substitute  cooperation 
for  competition  in  all  cases.  In  the  first  place,  it  cannot  be 
done,  because  so  long  as  people  prefer  themselves  and  those 
who  are  near  them  to  others  who  are  farther  from  them,  com- 
petition in  some  form  will  exist.  In  the  second  place,  even  if 
cooperation  could  be  substituted  for  competition,  it  would  be 
undesirable  in  many  cases,  though  desirable  in  others ;  that  is 
to  say,  there  are  some  cases  in  which  competition  works  so 


ECONOMIC  ACTIVITIES  69 

well  that  cooperation  could  not  improve  upon  it.  To  be  more 
specific,  competitive  production,  as  stated  before,  always  works 
well.  No  one  has  yet  succeeded  in  making  cooperation  in  pro- 
duction, either  on  a  large  scale  or  on  a  small  scale,  work  suc- 
cessfully for  a  long  period  of  time.  This  is  not  saying  that 
producers  may  not  occasionally  cooperate,  as  when  farmers 
help  one  another  in  special  lines  of  work.  In  our  rural  com- 
munities, especially  in  previous  generations,  there  were  many 
barn  raisings,  log  rollings,  corn  huskings,  and  other  examples 
of  genuine  and  beneficial  cooperation.  But  these  events  were 
only  incidents  in  a  kind  of  life  which  remained,  in  spite  of  them, 
predominantly  competitive.  Even  competitive  bargaining  some- 
times works  well.  Where  this  is  the  case  nothing  is  to  be  gained 
by  cooperation,  and  it  is  therefore  certain  to  fail,  because  the 
cooperators  will,  sooner  or  later,  lose  their  enthusiasm  when 
they  see  that  they  are  not  gaining  anything  by  it ;  that  is,  when 
they  see  that  it  is  not  working  any  better  than  competition. 
The  would-be  cooperators  should  choose  for  their  field  of  effort 
some  situation  where  competitive  bargaining  is  working  badly. 
There  they  will  have  a  chance  of  success.  But  no  cooperative 
scheme  runs  itself.  Even  where  there  is  a  distinct  and  un- 
doubted need  for  it,  it  will  succeed  only  when  some  capable 
person  gives  a  great  deal  of  time  and  study  and  hard  work  to  it. 
Compulsion  versus  voluntary  agreement.  With  an  unerring 
instinct  for  economic  falsehood  a  certain  class  of  writers  have 
persistently  obscured  this  question  of  cooperation  versus  com- 
petition by  confusing  it  with  working  under  compulsion  versus 
working  under  freedom  of  contract.  The  Panama  Canal  was 
not  built  cooperatively.  The  government  of  the  United  States 
decided  to  hire  others  to  do  it  instead  of  bargaining  with  con- 
tractors. They  who  did  the  work  did  not  cooperate,  any  more 
than  the  men  who  build  our  railroads  and  factories  or  work 
on  our  streets.  If  a  large  number  of  farmers  unite  to  run  a 
creamery  or  a  shoe  factory  of  their  own,  but  do  not  work  in  it 
themselves,  they  sometimes  call  it  a  cooperative  creamery  or 
shoe  factory.  In  reality  it  is  only  quasi  cooperative.  The 


70  PRINCIPLES  OF  NATIONAL  ECONOMY 

people  who  do  the  work  in  the  factory  are  hired  and  have  no 
more  to  say  about  the  management  than  they  would  have  if 
the  factory  were  owned  by  an  ordinary  joint-stock  corporation. 
A  cooperative  shoe  factory,  of  the  class  which  we  are  now 
discussing,  is  merely  an  organization  of  consumers  formed  for 
the  purpose  of  bargaining  for  its  shoes  more  successfully  than 
it  could  do  otherwise.  It  finds  that  it  can  bargain  directly  with 
workingmen,  tanneries,  and  others  to  better  advantage  than  it 
can  bargain  with  private  owners  of  shoe  factories. 

It  is  particularly  erroneous  to  speak  of  an  army  as  though 
it  were  a  cooperative  body.  It  works  under  authority  and  com- 
pulsion rather  than  under  a  system  of  free  contracting.  Sol- 
diers do  whatever  they  are  commanded  to  do  and  riot  whatever 
they  see  fit  to  bargain  to  do.  Experience  has  shown  that  armies 
can  succeed  in  no  other  way.  It  has  shown  also  that  industry 
can  succeed  on  the  basis  of  free  contract,  under  which  no  one 
does  anything  until  he  sees  fit  to  contract  to  do  so.  A  little 
military  experience  will  thoroughly  convince  our  people  that  the 
distinction  between  compulsion  and  freedom  is  not  the  same  as 
the  distinction  between  cooperation  and  competition. 

Cooperation  in  setting  standards  of  consumption.  There  is 
always  an  acute  need  for  a  kind  of  cooperation  that  can  stop 
competitive  consumption.  Unfortunately  that  need  is  not  very 
widely  understood.  One  reason  why  it  costs  us  so  much  to 
live  is  that  we  are  everlastingly  trying  to  keep  up  with  some- 
one else.  "It  takes  all  my  income,"  said  a  certain  congress- 
man, "to  keep  up  with  my  fool  neighbors."  He  was  expressing 
in  this  picturesque  manner  one  of  the  profound  facts  of  our 
economic  life.1  The  things  which  cost  us  so  much  money  are 
not  the  things  which  we  prize  for  their  own  sakes,  but  the  things 
which  we  feel  that  we  must  have  because  cur  neighbors  have 
them.  We  are,  each  of  us,  trying  to  live  up  to  a  standard  set 
by  someone  else.  Rich  and  poor  alike  are  afflicted  by  the  same 
disease.  The  rich  are  doubtless  more  to  blame  than  the  poor, 
but  the  poor  cannot  escape  all  blame.  If  they  would  try  to  live 

1  Compare  also  Mr.  Irving  Bacheller's  book  entitled  "  Keeping  up  with  Lizzie." 


ECONOMIC  ACTIVITIES  71 

rationally  and  not  try  to  keep  pace  with  someone  else  a  little 
richer  than  themselves,  they  would  not  find  it  so  hard  to  make 
both  ends  meet.  A  little  cooperation  among  themselves,  in  the 
way  of  setting  their  own  standards  of  dress  and  fashion,  would 
be  a  great  help.  If,  likewise,  the  well-to-do  would  not  try  to 
imitate  those  still  richer,  they  could  be  saved  much  worry  and 
vexation  of  spirit.  The  individual  finds  himself  almost  helpless. 
"As  well  be  out  of  the  world  as  out  of  style"  is  a  saying  which 
pretty  well  sums  up  the  situation  so  far  as  the  individual  is  con- 
cerned. But  a  large  group  of  people  who  would  cooperate  in 
the  work  of  setting  their  own  styles  need  not  be  either  out  of 
style  or  out  of  the  world.  Educated  people  who  see  the  prin- 
ciple involved  should  take  the  lead.  In  so  doing  they  would 
not  only  be  doing  themselves  a  favor  but  they  would  be  con- 
ferring a  priceless  benefit  upon  the  whole  nation. 


CHAPTER  V 

CONTROL  OF  ECONOMIC  ACTIVITIES 

Acquisitive  activities.  In  the  classification  of  acquisitive  ac- 
tivities (p.  60)  it  was  pointed  out  that  there  is  a  very  impor- 
tant difference  between  economical  and  uneconomical  methods 
of  acquisition.  It  is  highly  important,  therefore,  from  the 
standpoint  of  the  nation's  welfare  that  the  uneconomical  meth- 
ods of  acquisition  shall  be  suppressed  and  the  economical 
methods  encouraged.  Any  individual  who  uses  his  time  and 
strength  in  acquiring  wealth  uneconomically  is  not  only  going 
to  waste  himself,  and  therefore  wasting  the  resources  of  the 
nation,  but  he  is  likely  also  to  cause  others  to  waste  their  time 
and  energy  in  protecting  themselves  against  him.  This  also  is  a 
loss  to  the  nation.  But  if  everyone  can  be  induced  to  try  to 
get  what  he  wants  by  producing  it  or  rendering  a  service  to 
somebody  else,  then  everyone  will  have  a  very  strong  motive 
for  producing  and  serving.  When  everyone  is  doing  his  utmost 
to  produce  or  to  serve,  the  nation  is  very  prosperous. 

Methods  of  control.  This  consideration  alone  makes  it  neces- 
sary that  there  shall  be  some  way  of  controlling  the  acquisitive 
activities  of  individuals.  There  are  two  somewhat  widely  differ- 
ent methods  of  controlling  the  individual.  One  is  to  control  him 
by  force,  or  at  least  the  threat  of  force.  Offering  him  full 
opportunity  to  enjoy  the  product  of  his  own  labor  or  the  wages 
of  his  service  means  that  others  must  be  forcibly  restrained 
from  interfering  with  his  enjoyment  or  depriving  him  of  his 
possession.  He,  in  turn,  must  be  forcibly  restrained  from  in- 
terfering with  others  who  are  trying  to  produce  useful  things, 
to  render  useful  service,  and  to  enjoy  the  fruits  of  their  produc- 
tion or  service.  The  agency  which  exercises  this  kind  of  con- 
trol is  called  government. 

72 


CONTROL  OF  ECONOMIC  ACTIVITIES  73 

The  other  method  of  controlling  is  to  appeal  to  the  good-will 
of  the  individual  or  to  his  desire  for  the  good  opinion  of  his 
neighbors.  If  he  can  be  made  to  feel  kindly  disposed  toward 
all  his  neighbors  and  fellow  citizens,  he  is  not  likely  to  engage 
in  any  acquisitive  activity  which  is  harmful  to  them.  Likewise, 
if  he  cares  for  their  good  opinion  he  will  refrain  from  harming 
them  in  any  way.  If  his  own  good-will  is  intelligently  directed 
and  if  their  good  opinion  and  esteem  are  wisely  exercised,  he 
will  have  other  encouragement  to  be  useful  to  his  neighbors 
and  fellow  citizens.  This  means  that  he  will  produce  such 
things  as  they  would  like  to  have  or  render  such  services  as 
they  desire.  However  self-interested  he  may  be  he  will  prefer 
to  prosper  by  these  methods  rather  than  by  harmful  methods. 
In  short,  he  will  prefer  those  acquisitive  activities  which  we 
describe  as  economical  in  the  diagram  referred  to  and  avoid 
those  that  are  harmful. 

In  the  diagram  on  page  60  there  is  a  classification  of  meth- 
ods of  struggling  for  existence.  The  destructive  and  deceptive 
methods  correspond  to  those  acquisitive  activities  that  are  un- 
economical and  harmful.  Productive  methods  of  struggling  for 
existence  correspond  to  those  acquisitive  activities  that  are 
economical.  The  persuasive  methods  of  struggling  for  exist- 
ence are  probably,  on  the  whole,  economical  rather  than  un- 
economical, though  in  many  cases  they  probably  overlap.  So 
far  as  law  and  government,  with  their  clumsy  methods  and 
reliance  upon  force,  can  control  the  methods  of  struggling  for 
existence,  they  must  draw  the  line  in  that  diagram  between  de- 
ceptive methods  on  the  one  hand  and  persuasive  methods  on 
the  other,  forbidding  all  destructive  and  deceptive  activities 
and  permitting  or  encouraging  the  persuasive  and  productive. 
This  is  what  is  meant  by  suppressing  violence  and  fraud  and 
permitting  discussion,  persuasion,  and  argumentation  as  well 
as  production.  Morals  and  religion,  however,  may  go  a  little 
further  and  discourage  certain  forms  of  persuasion  which  over- 
lap somewhat  on  the  field  of  uneconomical  endeavor, — dema- 
gogy in  politics,  too  clever  and  unscrupulous  advertising  and 


74  PRINCIPLES  OF  NATIONAL  ECONOMY 

salesmanship,  and  a  good  many  other  persuasive  methods  that 
shade  off  into  deception.  These  are  undoubtedly  uneconomical 
and  should  be  discouraged  by  any  agency  that  can  do  so.  It  is 
difficult,  however,  for  any  agency  using  such  a  clumsy  device 
as  force  to  control  individuals  or  to  distinguish  sharply  between 
the  uneconomical  and  the  economical  forms  of  persuasion  and 
suppress  the  former  without  interfering  with  the  latter.  It  is 
only  when  a  method  is  clearly  deceptive  or  fraudulent  that  the 
machinery  of  the  law  can  deal  with  the  case. 

The  need  for  law.  Law  and  government  have  a  most  impor- 
tant part  to  perform  in  promoting  the  prosperity  of  the  people. 
Bagehot1  has  said  that  the  first  great  need  of  primitive  man  is 
for  law, — definite,  concise  law.  He  even  argued  that  it  is  more 
important  that  the  law  be  definite  and  concise  than  that  it  be 
just,  though  it  is  very  important  that  it  be  both.  It  is  probable 
that  a  system  of  laws  which  are  well  understood  because  they 
are  clear  and  concise  and  which  are  regularly  enforced  without 
variation  or  favoritism,  even  though  they  are  in  some  respects 
unjust,  is  better  for  a  people  than  a  system  of  laws  which  are 
in  essence  just,  but  which  are  not  clearly  understood  and  not 
regularly  and  impartially  enforced ;  but  of  course  it  would  be 
still  better  if  they  were  both  just,  on  the  one  hand,  and  clear, 
concise,  and  regularly  enforced,  on  the  other.  When  everyone 
knows  definitely  what  the  law  is  and  knows  definitely  that  it 
will  be  enforced  not  only  against  him  but  equally  in  his  defense, 
he  at  least  knows  what  he  can  count  upon.  Nothing  so  dis- 
courages industry  and  enterprise  as  uncertainty  as  to  what 
other  men  are  likely  to  do ;  and  uncertainty  as  to  the  enforce- 
ment of  law  contributes  to  that  uncertainty  as  to  what  other 
men  are  likely  to  do. 

The  problem  as  to  what  the  government  can  do,  through  its 
laws  and  its  administration,  for  the  promotion  of  the  economic 
prosperity  of  the  people  is  of  the  very  greatest  importance. 
The  specific  aim  should  be  to  call  out  the  very  best  and  most 
productive  efforts  of  every  individual.  Since  the  greatest  re- 

1  Physics  and  Politics  (fifth  edition),  p.  21.    London,  1879. 


CONTROL  OF  ECONOMIC  ACTIVITIES  75 

source  of  any  nation  is  the  productive  energy  of  the  people 
themselves,  it  follows  that  the  conservation  and  development  of 
that  productive  energy  is  the  most  constructive  policy  that  any 
government  can  pursue.  It  also  follows  that  the  worst  form  of 
waste  that  any  government  could  permit  or  encourage  would 
be  the  waste  of  the  productive  energy  of  the  people. 

The  repression  of  destructive  and  deceptive  action.  The  first 
and  most  obvious  thing  which  the  government  must  do  is  to 
prohibit  and  prevent  all  the  destructive  and  deceptive  forms  of 
conflict  as  outlined  at  the  beginning  of  the  last  chapter.  It  is 
of  the  utmost  importance  that  this  shall  be  accomplished  ;  and, 
what  is  equally  important  in  determining  the  duty  of  the  gov- 
ernment, law  and  government  are  the  only  agencies  which  can 
accomplish  it.  He  who  has  no  moral  scruples  against  pursuing 
his  selfish  interests  by  destructive  or  deceptive  methods  can  be 
restrained  only  by  the  superior  force  of  the  many  as  it  is  ex- 
ercised through  the  government.  If  he  is  allowed  to  pursue 
his  selfish  interests  by  these  methods,  he  not  only  wastes  his 
own  powers  in  unproductive  efforts  but  also  tends  to  destroy 
the  products  of  other  people ;  and,  what  is  more  important, 
he  discourages  them  from  further  productive  effort  and  thus 
causes  their  productive  powers  to  go  to  waste.  It  may,  there- 
fore, be  said  that,  whatever  other  functions  government  may 
have,  its  primary  function  is  to  repress  the  destructive  and  de- 
ceptive methods  of  pursuing  self-interest. 

The  first  effect  of  this  repression  of  the  destructive  and  de- 
ceptive methods  is  to  transform  the  struggle  for  self-interest 
from  the  brutal  struggle  for  existence,  where  the  strong  prey 
upon  the  weak  and  the  ferocious  upon  the  gentle,  into  a  struggle 
wherein  the  persuasive  and  the  productive  triumph  over  the 
unpersuasive  and  the  unproductive.  If  it  were  possible  (and 
it  probably  is)  to  carry  this  repression  still  farther,  and  not 
only  to  eliminate  all  destruction  and  deception  but  also  to 
eliminate  from  persuasion  all  demagogy,  all  appeal  to  passion, 
everything,  in  fact,  except  the  appeal  to  reason  and  justice, 
then  it  would  be  literally  true  that  reason  would  everywhere 


76  PRINCIPLES  OF  NATIONAL  ECONOMY 

triumph  over  unreason,  justice  over  injustice,  usefulness  over 
uselessness,  and  productiveness  over  unproductiveness.  Under 
such  a  government  each  and  every  one  would  succeed  in  getting 
what  he  wanted  in  exact  proportion  as  he  contributed  to  others 
what  they  wanted ;  the  most  useful  would  be  the  most  success- 
ful, and  the  indispensable  man  would  be  the  great  man.  In  that 
situation  we  should  have  a  literal  fulfillment  of  the  words 
"  Whosoever  will  be  chief  among  you,  let  him  be  your  servant." 
And  a  servant  is  not  necessarily  one  who  comes  at  your  beck 
and  call  to  do  your  bidding ;  he  may  be  merely  the  one  who 
does  you  a  service  or  who  produces  what  you  need. 

Nothing  could  be  more  favorable  to  the  prosperity  of  a 
nation  than  a  general  following  of  such  a  rule.  If  we  could 
conceive  of  a  nation  in  which  no  one  could  gain  anything  except 
by  producing  an  equivalent  or  by  contributing  an  equal  amount 
to  the  prosperity  of  someone  else,  then  the  more  ardently  every- 
one strove  to  better  his  own  condition  the  more  ardently  would 
he  be  striving  to  better  the  condition  of  someone  else,  driven 
thereto  not  by  benevolence  or  philanthropy  but  by  self-interest. 
Then  the  more  people  there  were  striving  to  acquire  wealth 
the  more  there  would  be  striving  to  produce  it  and  the  more 
ardently  they  desired  to  acquire  it  the  more  ardently  they 
would  labor  to  produce  it.  Such  a  nation  would  certainly 
prosper  out  of  all  proportion  to  a  nation  in  which  destructive 
and  deceptive  methods  were  practiced  by  a  large  proportion  of 
its  people. 

Two  ways  of  promoting  the  productive  life.  There  are  two 
conceivable  methods  by  which  such  an  ideal  might  be  realized  : 
one  is  such  a  perfection  of  the  moral  nature  of  every  person  in 
the  nation  as  to  make  him  unwilling  to  gain  anything  without 
producing  it  or  its  equivalent  or  rendering  a  service  of  equiva- 
lent value ;  the  other  is  such  perfection  of  law  and  government 
as  to  make  it  impossible  for  anyone,  however  much  he  desired 
to  do  so,  to  gain  anything  without  producing  it  or  its  equivalent 
or  rendering  an  equivalent  service.  In  neither  case  would  it 
be  necessary  for  men  to  cease  caring  more  for  themselves  and 


CONTROL  OF  ECONOMIC  ACTIVITIES  77 

their  own  families  and  neighbors  than  for  other  men  and  their 
families  and  neighbors.  In  neither  case  would  it  be  necessary 
to  do  away  with  competition  or  the  struggle  for  individual  gain. 
It  would  only  be  necessary  so  to  hedge  men  about,  either  by 
moral  restraints  or  by  positive  laws,  as  to  compel  them  to  com- 
pete fairly,  always  giving  an  equivalent  for  everything  they  get. 

It  must  not  be  hastily  assumed  that  the  repression  by  the 
government  of  the  destructive  and  deceptive  methods  of  acquir- 
ing possession  of  desirable  things  is  merely  negative  work.  By 
this  kind  of  repression  every  producer  is  protected  in  the 
possession  and  enjoyment  of  the  fruits  of  his  own  productive 
effort.  Knowing  that  he  will  enjoy  the  full  advantage  of  his 
own  industry,  enterprise,  and  foresight,  he  will  have  the  strong- 
est kind  of  motive  for  exercising  these  virtues  to  their  full 
capacity.  This  lets  loose  the  productive  energy  of  the  people 
in  a  way  which  would  be  impossible  without  the  protection  of 
law  and  government.  The  kind  of  people  who  build  civiliza- 
tions can  be  trusted  to  take  the  initiative  and  start  all  sorts  of 
productive  enterprises  if  they  are  thus  safeguarded.  There  is 
nothing  any  more  positive  and  constructive  than  the  free  spirit 
of  a  vigorous  race  of  people  when  they  are  left  to  direct  them- 
selves in  the  field  of  production,  but  are  restrained  from  enter- 
ing the  fields  of  destruction  and  deception.  They  can  safely  be 
intrusted  with  the  task  of  looking  after  themselves  if  those  who 
are  criminally  inclined  can  be  prevented  from  interfering  with 
them.  Give  the  people  confidence  in  the  justice  and  efficiency 
of  the  government  and  in  one  another,  and  their  own  productive 
virtues  will  develop,  their  industrial  power  will  multiply  itself, 
,and  the  prosperity  and  power  of  the  nation  will  be  assured. 

Confidence  and  economy.  Confidence  is  one  of  the  greatest 
of  all  economizers  of  human  energy.  Its  greatest  value  is  not 
in  the  stability  which  it  brings  to  the  financial  market,  though 
that  is  very  important ;  it  is  found  rather  in  the  unshackling  of 
enterprise  which  results  from  confidence  in  the  government  and 
in  one's  neighbors  and  fellow  citizens.  The  average  citizen  has 
more  points  of  contact  with  his  neighbors,  his  associates  in 


78  PRINCIPLES  OF  NATIONAL  ECONOMY 

business,  and  his  fellow  citizens  than  with  the  government  or 
the  financial  market.  It  is  in  these  numerous  points  of  contact 
and  in  the  vast  sum  of  these  dealings  of  man  with  man  that 
confidence  produces  its  greatest  economies,  and  its  lack  the 
greatest  waste. 

Professor  E.  A.  Ross,  in  his  book  entitled  "The  Changing 
Chinese,"  mentions  certain  bad  neighborhoods  in  China  where 
the  farmer  must  guard  his  rice  field  every  night  to  keep  his  crop 
from  being  destroyed  or  stolen.  The  energy  that  is  wasted 
when  so  many  people  stay  awake  every  night  must  be  stupen- 
dous, but  this  waste  is  a  trifling  matter  compared  with  the  dis- 
couragement and  lack  of  enterprise  which  result  from  the 
feeling  of  uncertainty  which  such  lawless  conditions  beget.  Un- 
less we  have  at  some  time  been  confronted  by  the  same  or  a 
similar  situation,  we  can  hardly  realize  how  much  energy  we 
save  by  being  able  to  sleep  at  night  in  confidence  that  the 
products  of  our  labor  will  not  disappear  before  morning. 

Before  we  expend  too  much  sympathy  on  those  Chinese  farm- 
ers we  should  consider  the  condition  of  the  fruit  growers, 
gardeners,  and  farmers  in  the  neighborhood  of  some  of  our 
large  towns.  Unless  one  is  very  favorably  situated  with  respect 
to  police  protection,  one  is  frequently  compelled  to  keep  a 
watchman  or  else  to  expose  the  entire  produce  of  his  toil  to  the 
depredations  of  town  marauders.  Even  though  these  marauders 
are  generally  thoughtless  rather  than  vicious,  their  work  is  just 
as  expensive  to  the  producer  as  though  they  were  degenerate 
criminals.  They  occasion  the  same  economic  waste  and  dis- 
couragement; they  therefore  detract  just  as  much  from  the 
national  efficiency  and  add  just  as  much  to  the  cost  of  the  neces- 
saries of  life  for  all  classes,  the  very  poor  as  well  as  the  very 
rich.  Their  depredations  are  especially  disastrous  to  the  family 
garden,  where  the  owner  cannot  afford  to  hire  a  watchman  and 
is  himself  engaged  in  other  work  which  makes  it  necessary  for 
him  to  sleep  at  night. 

Observance  of  law  a  patriotic  duty.  There  are  three  reasons 
for  choosing  the  orchardist  end  the  gardener  as  examples  of 


CONTROL  OF  ECONOMIC  ACTIVITIES  79 

producers  who  gain  through  a  government  and  a  community  in 
which  they  can  have  confidence,  and  lose  through  a  government 
and  a  community  in  which  they  can  have  no  confidence.  In 
the  first  place,  it  is  so  obvious  that  it  does  not  have  to  be  proved 
that  these  men  are  producers  who  contribute  certain  vital  neces- 
sities to  the  prosperity  and  well-being  of  the  whole  community, 
and  that  the  community  gains  when  they  are  successful  and 
suffers  when  they  are  unsuccessful.  In  the  second  place,  cer- 
tain young  persons  who  read  this  book  may  know  something  at 
first  hand  about  the  troubles  and  discouragements  which  those 
producers  have.  In  the  third  place,  it  ought  to  be  easy  for  the 
average  person  to  understand  that  any  act  of  his  which  makes 
it  uncertain  whether  or  not  the  producer  will  reap  the  rewards 
of  his  labor  is  an  injury  not  only  to  the  producer  but  to  the 
consumer  and  to  the  whole  nation  as  well,  and  that,  in  conse- 
quence, the  observance  of  law  and  the  preservation  of  order  are 
as  truly  patriotic  duties  as  fighting  the  battles  of  one's  country. 
Standardization  and  economy.  Aside  from  police  protection 
there  are  certain  other  important  functions  which  law  and  gov- 
ernment can  perform  better  than  private  individuals  or  volun- 
tary groups  of  individuals.  One  of  the  most  important  of  these 
is  the  standardizing  of  coins,  weights,  and  measures.  What- 
ever differences  of  opinion  may  exist  with  respect  to  other 
functions  of  government,  little  is  said  or  to  be  said  against 
coining  money  and  fixing  the  standards  of  weights  and  meas- 
ures.1 Though  these  two  functions  are  grouped  together  in  the 
same  clause  of  our  federal  constitution,  it  is  doubtful  if  it  is 
generally  understood  what  a  close  connection  there  is  between 
them.  Both  result  in  great  economy  of  effort  in  the  transfer  of 
goods.  The  economy  involved  in  transferring  coined  money 
instead  of  uncoined  metal  is  apparent.  Coining  the  metal  by  a 
reliable  and  responsible  government  merely  gives  the  public 
confidence  in  its  weight  and  fineness.  When  it  is  once  coined  it 
is  enabled  to  pass  from  hand  to  hand  without  the  labor  of  in- 

1  See   the   author 's   articles    on   "  Standardization    in   Marketing,"    Quarterly 
Journal  of  Economics,  February,  1917. 


8o  PRINCIPLES  OF  NATIONAL  ECONOMY 

spection  on  the  part  of  everyone  who  receives  it.  Otherwise  the 
receiver  would  always  have  to  weigh  it  to  determine  its  quan- 
tity and  test  it  to  determine  its  quality.  When  it  is  coined  it 
" sells"  (if  we  may  speak  of  selling  money)  on  grade  and  repu- 
tation rather  than  on  inspection.  Confidence  is  what  makes  it 
sell  on  grade  and  reputation ;  lack  of  confidence  would  necessi- 
tate inspection, —  that  is,  weighing  and  testing, — which  would 
be  very  wasteful  of  time  and  labor. 

Selling  on  grade  rather  than  on  inspection.  By  the  process  of 
standardization  any  other  commodity  may  also  sell  on  grade 
and  reputation  rather  than  on  inspection.  This  also  would  be 
economical  and,  as  in  the  case  of  coin,  would  be  a  result  of 
confidence.  All  civilized  governments  have  done  something  to- 
ward standardization  and  the  establishment  of  confidence  by 
fixing  uniform  standards  for  determining  quantity ;  that  is,  by 
fixing  standards  of  weights  and  measures.  In  proportion  as 
these  standards  are  fixed  and  enforced  by  law  we  save  time  and 
energy  in  transferring  goods.  If  it  were  possible  to  go  farther 
and  fix  and  enforce  standards  of  quality  as  well  as  of  quantity, 
still  greater  economies  would  be  effected. 

Individuals  and  firms  have  sometimes  succeeded  in  standard- 
izing their  goods,  both  as  to  quantity  and  as  to  quality,  so 
effectively  that  buyers  can  buy  on  grade  and  reputation  rather 
than  on  inspection.  Whenever  individuals  or  firms  succeed  in 
inspiring  such  a  degree  of  confidence,  it  generally  increases 
the  salability  of  their  goods.  It  saves  the  purchaser  some  time 
and  trouble,  and  he  is  usually  willing  to  pay  something  for  that 
saving.  Only  the  government,  however,  can  enforce  uniform 
standards  among  all  producers  and  all  dealers. 

Not  the  least  of  the  advantages  of  a  minute  division  of 
labor1  is  the  fact  that  each  individual  can  avoid  the  necessity 
of  being  expert  in  many  things  and  therefore  has  time  to  be- 
come a  specialist  in  one  thing.  One  of  the  advantages  of  stand- 
ardizing commodities  is  that  the  average  consumer  can  save 
himself  the  trouble  of  being  an  expert  buyer  or  an  expert  judge 

1  See  Chapter  X,  on  The  Division  of  Labor. 


CONTROL  OF  ECONOMIC  ACTIVITIES  8 1 

of  the  many  things  which  he  has  to  purchase.  If  he  has  con- 
fidence not  only  in  the  weights  and  measures  but  also  in  the 
government  which  standardizes  and  the  seller  who  uses  them, 
and  if  he  has  the  same  degree  of  confidence  in  the  alleged  qual- 
ity of  the  goods  offered  for  sale,  he  may  make  his  purchases 
with  very  little  expenditure  of  time  and  strength  and  save  his 
time  and  strength  for  his  own  special  work. 

Enforcement  of  contracts.  The  enforcement  of  contracts  and 
agreements  is  another  way  of  creating  confidence  and,  through 
the  creation  of  confidence,  of  economizing  energy  and  encourag- 
ing production.  Where  men  commonly  regard  contracts  as 
scraps  of  paper  and  do  not  solemnly  and  completely  fulfill  them, 
and  where  law  and  government  fail  to  compel  their  literal  ful- 
fillment, there  would,  of  course,  be  great  difficulty  in  working 
together  in  productive  enterprises. 

The  exercise  of  authority.  It  is  clear,  therefore,  that  one 
very  important  function  of  government  is  to  create  that  state 
of  confidence  which  results  in  economy,  and  to  create  it,  first, 
by  repressing  destruction  and  deception  through  the  police 
power  of  the  state,  second,  by  standardizing  products,  and, 
third,  by  enforcing  contracts.  These  tasks,  which  are  neces- 
sary in  the  interest  of  the  highest  economy,  are  thrown  upon 
the  government  because  no  other  agency  is  in  a  position  to 
perform  them.  They  call  for  the  exercise  of  authority,  backed 
up  by  physical  force,  and  that  is  a  work  which  can  be  intrusted 
to  no  private  agency. 

Producing  nonmarketable  utilities.  We  need  not  limit  the 
functions  of  government,  however,  to  those  requiring  the  ex- 
ercise of  authority,  though  usually  it  will  be  found  that  the 
government  is  best  fitted  to  perform  those  which  require  some 
degree  of  authority,  whereas  private  individuals  and  organiza- 
tions can  usually  be  intrusted  with  those  enterprises  which  can 
be  carried  out  wholly  on  the  basis  of  free  contract.  This  dis- 
tinction is  not  always  clear,  but  a  little  careful  study  will 
usually  reveal  the  fact  that  there  is  an  element  of  compulsion 
in  those  enterprises  which  the  government  carries  on  most  sue- 


82  PRINCIPLES  OF  NATIONAL  ECONOMY 

cessfully.  The  maintenance  of  lighthouses  will  serve  as  an 
illustration.  If  a  private  company  were  to  maintain  light- 
houses, its  product  (light)  would  be  difficult  to  sell.  The  light 
would  shine  for  all  who  came  within  its  reach,  and  the  ship- 
owner who  refused  to  pay  for  it  would  get  the  same  advantage 
as  the  one  who  paid  his  share.  All  who  get  the  benefit  should 
be  compelled  to  pay  a  share  of  the  cost,  either  in  the  form  of 
taxation  or  in  some  other  form.  This  requires  a  power  of  com- 
pulsion which  the  government  alone  possesses. 

Even  in  the  case  of  the  post  office,  as  it  is  thought  best  to  run 
it,  there  is  an  element  of  compulsion.  Many  local  post  offices 
are  maintained  at  a  loss,  since  there  is  not  local  business  enough 
to  pay  expenses.  Under  private  management  these  local  offices 
would  be  closed,  unless  the  people  of  the  neighborhood  would 
voluntarily  pay  enough  postage  to  cover  expenses  or  unless 
larger  communities  would  voluntarily  pay  enough  surplus  to 
cover  the  losses  on  the  smaller  offices.  It  is  deemed  expedient 
to  establish  a  uniform  rate,  regardless  of  differences  in  the  cost 
of  service.  Some  people  are  therefore  compelled  to  pay  more 
than  the  cost  of  the  service  which  they  receive,  in  order  that 
others  may  get  their  service  for  less  than  it  costs.  No  one  com- 
plains of  this  ;  but  it  is  apparent  that  it  could  not  be  carried  on 
in  this  way  on  the  basis  of  free  contract.  Some  degree  of  com- 
pulsion is  necessary  in  order  to  compel  some  people  in  some 
localities  to  pay  higher  rates  than  are  necessary, — higher  than 
they  would  have  to  pay  if  they  were  permitted  to  patronize 
private  postal  carriers.  The  good  of  the  whole  country  seems 
to  demand  that  this  be  done.  The  government  alone  can  ex- 
ercise the  necessary  authority,  since  it  is  sometimes  thought 
best  even  to  compel  the  people  to  pay  in  the  form  of  taxes 
enough  to  cover  the  losses  on  the  postal  business. 

However,  we  need  not  hold  to  any  hard-and-fast  definition 
of  the  functions  of  the  government.  It  is  sufficient  to  say  that 
anything  is  a  proper  task  for  the  government  if  there  is  a  rea- 
sonable ground  for  believing  that  the  government  can  do  it 
better  and  more  economically  than  private  enterprise  can  rea- 


CONTROL  OF  ECONOMIC  ACTIVITIES  83 

sonably  be  expected  to  do  it.  That  reasonable  ground  exists  in 
favor  of  government  enterprise  whenever  authority  or  com- 
pulsion is  necessary  to  its  successful  accomplishment.  When 
there  is  no  need  whatever  for  compulsion  (that  is,  when  every 
part  of  the  work,  including  the  selling  of  the  product,  can  be 
conducted  on  the  voluntary  basis  of  free  contract),  the  general 
tendency  is  to  leave  the  task  to  private  enterprise. 

Beneficent  uses  of  power.  There  is  a  wide  difference,  how- 
ever, between  using  force  to  compel  a  man  to  do  something 
which  he  has  voluntarily  contracted  to  do  and  using  it  to  com- 
pel him  to  do  something  which  he  has  never  agreed  to  do  and 
would  prefer  not  to  do.  As  a  matter  of  observation  it  will  be 
found  that  most  if  not  all  of  the  things  which  the  government  is 
able  to  do  well  involve  some  element  of  compulsion  of  the  latter 
kind.  Public  education  will  serve  as  an  example.  Wherever  it 
is  a  success  there  is  either  compulsory  attendance  or  compulsory 
payment  or  a  combination  of  both.  In  the  lower  grades  of  our 
public-school  system  we  have  both.  In  the  higher  grades  and 
in  our  state  colleges  and  universities  we  have  compulsory  pay- 
ment ;  that  is,  the  taxing  power  of  the  government  is  used  to 
procure  the  means  for  the  payment  of  expenses.  Both  com- 
pulsory attendance  upon  the  lower  grades  and  compulsory  sup- 
port of  all  grades  are  beneficent  uses  of  the  power  of  the 
government  over  the  individual ;  but  it  must  be  remembered 
that  it  is  the  use  of  power.  There  is  no  reason  for  believing 
that  a  government  school  on  a  purely  voluntary  basis  would  be 
superior  to  a  private  school ;  that  is  to  say,  if  both  attendance 
and  payment  were  voluntary  on  the  part  of  individuals,  it  is 
difficult  to  see  how  it  could  be  more  successfully  managed  by 
the  government  than  by  some  private  agency. 

That  which  is  true  of  public  education  appears  to  be  true  of 
every  other  enterprise  upon  which  it  would  be  possible  for  the 
government  to  enter.  The  government  has  no  advantage  over 
a  private  individual  or  a  voluntary  association  of  individuals 
except  in  the  use  of  force  or  compulsion.  That  is  to  say,  any 
enterprise  which  can  be  carried  on  on  a  purely  voluntary  and 


84  PRINCIPLES  OF  NATIONAL  ECONOMY 

contractual  basis,  without  any  use  of  compulsion  except  in  the 
enforcement  of  contracts  which  are  themselves  voluntarily 
entered  into,  can  probably  be  fully  as  well  managed  by  private 
individuals  and  associations  as  by  the  government ;  but  if  any 
degree  of  compulsion  is  necessary  in  order  to  insure  its  success, 
it  becomes  a  fit  subject  for  government  enterprise.  There  is 
undoubtedly  a  large  field  for  the  beneficent  exercise  of  compul- 
sion. There  is  also  a  large  field  where  freedom  and  voluntary 
agreements  are  better  than  compulsion.  If  we  can  locate  the 
limits  of  the  beneficent  exercise  of  force,  we  shall  have  located 
the  limits  to  the  beneficent  exercise  of  government  enterprise. 

Human  interests  sometimes  in  conflict  and  sometimes  in 
harmony.  In  a  previous  chapter  it  was  pointed  out  that  human 
interests  are  frequently  in  conflict  with  one  another ;  they  are 
also  frequently  in  harmony  with  one  another.  Where  they  are 
in  conflict  (that  is,  where  one  man's  interest  conflicts  with 
another's)  there  is  likely  to  be  trouble.  Only  three  things  can 
prevent  uneconomic  (that  is  to  say,  either  destructive  or  de- 
ceptive) conflict.  The  first  is  the  voluntary  submission  of  the 
weaker  man  through  fear.  That  results  in  despotism.  The 
second  is  such  moral  self-restraint  on  the  part  of  one  or  both 
as  will  prevent  a  quarrel.  Willingness  to  give  up  not  only  one's 
coat  but  one's  cloak  also  would  preserve  peace.  The  third  is  a 
strong  and  effective  umpire  who  will  promptly  decide  the  case 
and  enforce  his  decision  upon  both  parties  to  the  conflict.  This 
umpire  is  the  government. 

It  will  generally  be  agreed,  except  by  extreme  anarchists, 
that  wherever  human  interests  come  in  conflict  a  strong  umpire 
of  some  kind  will  be  necessary  until  men  are  so  self-restrained 
by  their  morals  or  their  religion  as  to  govern  themselves.  With- 
out such  self-restraint  the  conflict  of  interests  will  result  in 
the  wasting  of  human  life  and  energy  by  destructive  combats, 
fights,  and  duels,  unless  there  is  a  government  at  hand  to  settle 
the  difference  and  send  the  disputants  about  their  business. 

Government  control  unnecessary  where  human  interests  are  in 
harmony.  But  human  interests  are  sometimes  harmonious. 


CONTROL  OF  ECONOMIC  ACTIVITIES  85 

When  this  is  the  case  the  individual  who  pursues  his  own  in- 
terest is  also  promoting  the  interest  of  others.  Within  this 
field  where  interests  are  in  harmony  it  is  true,  as  Adam  Smith 
said  long  ago,  that  we  are  sometimes  led  as  by  an  invisible 
hand  to  promote  the  public  interests  while  trying  to  promote 
our  own.1  It  is  to  the  interest  of  the  farmer  to  grow  good 
crops;  it  is  likewise  to  the  interest  of  the  public  to  have  him 
do  so.  In  this  and  a  vast  multitude  of  other  cases  the  individ- 
ual needs  no  compulsion  to  lead  him  to  promote  the  public 
good.  In  all  such  cases  it  seems  to  work  better  in  the  long  run 
to  leave  the  individual  very  much  to  himself.  The  wise  govern- 
ment will  generally  keep  its  hands  off. 

Tendency  of  government  officers  to  increase  their  own  power 
and  importance.  There  is,  however,  a  natural  tendency  in  all 
human  beings  to  magnify  their  own  power  and  importance. 
This  tendency  seems  peculiarly  strong  in  that  kind  of  person 
who  manages  to  get  elected  to  public  office.  Modesty  is  not  the 
outstanding  characteristic  of  the  average  candidate  who  seeks 
office,  though  he  may  feign  it  pretty  well.  The  more  the  gov- 
ernment undertakes,  the  greater  become  the  power  and  impor- 
tance of  the  officeholder.  There  is,  therefore,  a  strong  tendency 
on  the  part  of  all  successful  candidates  to  extend  the  functions 
of  government.  The  arguments  in  favor  of  this  policy  as  used 
by  the  elected  are  sometimes  so  subtle  as  to  deceive  the  very 
elect.  They  are  always  made  as  though  in  the  interest  of  the 
people,  though  they  are  really  in  the  interest  of  the  officehold- 
ing  class.  It  is  a  means  of  exalting  the  position  of  the  vote 
getter.  It  therefore  behooves  the  average  citizen  who  has  no 
hope  of  public  office  to  study  very  critically  all  arguments 
favoring  the  extension  of  the  functions  of  the  government. 

1  He  generally,  indeed,  neither  intends  to  promote  the  public  interest,  nor 
knows  how  much  he  is  promoting  it.  ...  By  directing  (his)  industry  in  such  a 
manner  as  its  produce  may  be  of  greatest  value,  he  intends  only  his  own  gain,  and 
he  is  in  this,  as  in  many  other  cases,  led  by  an  invisible  hand  to  promote  an  end 
which  was  no  part  of  his  intention.  .  .  .  By  pursuing  his  own  interest  he  fre- 
quently promotes  that  of  society  more  effectually  than  when  he  really  intends 
to  promote  it. — "Wealth  of  Nations,"  Book  IV,  chap,  ii 


86  PRINCIPLES  OF  NATIONAL  ECONOMY 

The  incompetent.  There  is,  however,  the  question  of  the 
people  who  are  not  competent  to  pursue  intelligently  either 
their  own  interest  or  the  public  interest.  The  feeble-minded, 
the  insane,  and  the  immature  who  have  no  natural  guardians 
must,  of  course,  have  their  interests  looked  after  and  cared  for 
by  the  government.  With  them  it  is  not  a  question  of  the  con- 
flict or  harmony  of  their  interests  with  those  of  the  public ;  it 
is  a  question  of  their  competence  to  pursue  even  their  own  in- 
terests intelligently. 

The  individual's  wisdom  is  not  increased  suddenly  when  he 
is  put  into  public  office.  Is  anyone  really  competent  to  pursue 
his  own  interest  intelligently?  This  question  is  sometimes 
asked  by  those  who  advocate  government  activity  in  behalf  of 
all  classes  of  people.  This  is  not  a  very  convincing  argument, 
for  the  reason  that  it  goes  too  far.  If  no  one  is  competent  to 
look  after  his  own  interests,  how  can  he  possibly  be  competent 
to  look  after  the  interests  of  the  rest  of  mankind  ?  The  office- 
holder is  merely  a  man  or  a  woman  like  the  rest  of  us.  If  we 
are  not  able  to  look  after  ourselves,  neither  is  he  or  she  able  to 
look  after  himself  or  herself,  much  less  to  look  after  the  rest 
of  us. 

Because  of  such  considerations  as  these,  the  wisdom  of  man- 
kind has  for  centuries  moved  toward  the  conclusion  that  gov- 
ernment should  confine  itself  mainly  to  the  control  of  the  field 
where  individual  interests  come  in  conflict,  leaving  mature 
people  of  sound  mind  to  govern  themselves  wherever  and  when- 
ever their  interests  are  harmonious.  There  are  occasional  re- 
actionary tendencies  toward  more  government  interference,  but 
these  are  usually  encouraged  by  those  whose  expertness  lies  in 
the  direction  of  vote  getting  rather  than  by  those  whose  expert- 
ness  consists  in  the  power  to  do  useful  and  necessary  things. 

Force  not  the  only  means  of  control.  It  has  already  been 
shown  that  some  degree  of  control  by  government  over  individ- 
ual conduct  is  necessary,  first,  by  reason  of  certain  conflicts 
of  interest  among  individuals  and,  second,  because  of  the  in- 
competence of  certain  defective  individuals  and  others  of  low 


CONTROL  OF  ECONOMIC  ACTIVITIES 


mentality  to  take  care  of  themselves.  Government  is  the  only 
agency  that  is  permitted  under  civilized  conditions  to  exercise 
forcible  control  or  to  exercise  force  to  control  individual  con- 
duct. There  are,  however,  other  ways  of  influencing  conduct 
besides  force,  and  there  are  other  agencies  than  government 
that  may  influence  individual  conduct.  Force  is  necessary  to 
prevent  some  of  the  cruder  forms  of  misconduct,  but  it  is  prob- 
able that  other  influences  must  be  relied  upon  to  secure  right 
conduct  of  the  more  refined  sorts.  Some  of  these  refinements 
of  conduct  may  be  quite  as  important  as  the  cruder  forms.  It 
is,  for  example,  socially  harmful  for  well  men  to  remain  idle 
when  others  are  at  work,  or  for  a  man  even  to  run  the  risk  of 
catching  cold ;  but  it  would  be  intolerable  if  the  government 
were  empowered,  except  in  great  emergencies,  to  conscript  idle 
men  for  work,  or  to  punish  a  man  for  needlessly  catching  cold. 
In  ordinary  times  the  conservation  of  the  man  power  of  the 
nation  must  depend  mainly  upon  moral  control. 

Waste  of  man  power.  It  was  suggested  in  a  former  chapter 
that  the  prosperity  of  a  nation  depended  more  upon  the  econ- 
omizing and  utilizing  of  its  fund  of  human  energy  than  upon 
any  other  factor  and  that  in  consequence  the  most  destructive 
forms  of  waste  were  those  which  wasted  or  dissipated  portions 
of  that  fund.  When  a  man's  energy  is  going  to  waste,  his  life 
is  going  to  waste,  and  he  becomes  a  drain  upon,  rather  than  an 
addition  to,  the  national  strength.  The  following  outline  indi- 
cates some  of  the  more  familiar  ways  in  which  men  go  to  waste : 

,      ...     (  Involuntarily  (the  unemployed) 
\  Voluntarily  (the  leisure  class) 

C  Through  lack  of  training 

The  ineffectively  employed-;  Through  lack  of  opportunity 
[  Through  lack  of  initiative 

fin  vice 
Wasting  their  own  energy^  T      ,.    .     ,. 

>J  [In  dissipation 

The  harmfully  f  By  crime 

employed  By  fraud 

Wasting  the  energy  of  other  I         . 

-!  By  luxury 

peop!c  |  By  bad  investing 

[  By  false  teaching 


MEN  WHO 
GO  TO 
WASTE 


88  PRINCIPLES  OF  NATIONAL  ECONOMY 

For  some  of  these  forms  of  waste,  law  and  government  alone 
can  furnish  the  remedy.  Whenever  force  or  compulsion  is 
necessary  and,  at  the  same  time,  effective,  government  can  and 
should  use  the  force  of  positive  law,  supported  by  penalties. 
But  there  are  many  forms  of  waste  which  cannot  be  remedied 
by  force  or  compulsion,  at  least  not  without  causing  greater 
waste  of  other  kinds.  To  try  to  control  by  law  such  things  as 
laziness,  private  vices,  luxury,  false  teaching,  and  many  other 
wasteful  and  harmful  tendencies  would  require  an  intolerable 
amount  of  espionage  and  repression.  The  waste  from  this 
source  might  easily  overbalance  the  waste  from  the  bad  habits 
which  the  law  was  trying  to  control.  In  all  such  cases  we  must 
fall  back  upon  morals  and  religion  to  induce  self-restraint  and 
the  voluntary  adoption  of  sound  habits. 

Can  morality  be  taught  ?  There  are  two  conflicting  theories 
as  to  the.  results  of  moral  teaching.  One  is  that  such  results  are 
generally  negligible  because  moral  habits  are  the  result  of  eco- 
nomic and  social  surroundings;  the  other  is  that  man's  moral 
nature  may  be  so  developed  by  teaching  and  example  as  to 
render  it  proof  against  bad  economic  and  social  conditions, — 
that  these  conditions  are  more  likely  to  be  the  result  than  the 
cause  of  the  moral  habits  of  the  people.  The  truth  seems  to  be 
found  in  a  combination  of  these  two  theories.  We  are  un- 
doubtedly influenced  by  our  surroundings,  but  we  can  also  by 
sheer  force  of  character  not  only  resist  but  even  overcome  and 
change  our  surroundings. 

Again,  weak  characters  are  more  largely  controlled  by  their 
surroundings  than  are  strong  characters.  Two  men  may  go 
under  a  cold  shower  bath.  One,  being  in  vigorous  health,  comes 
out  feeling  refreshed.  To  him  a  cold  shower  is  a  favorable 
rather  than  an  unfavorable  condition.  The  other,  being  weak 
to  begin  with,  comes  out  with  a  chill.  To  him  it  was  an  un- 
favorable rather  than  a  favorable  condition.  Yet  it  was  the 
same  shower  bath,  with  the  same  temperature,  etc.  If  one  were 
studying  jellyfish,  one  might  find  that  they  were  the  sport  of 
such  circumstances  as  the  winds,  the  waves,  the  tides,  and  the 


CONTROL  OF  ECONOMIC  ACTIVITIES  89 

ocean  currents;  but  if  one  were  studying  sharks,  one  might, 
with  equal  certainty,  find  that  they  were  independent  of  all 
such  circumstances.  Similarly,  if  one  were  studying  human 
jellyfish,  one  might  find  them  and  their  moral  habits  to  be  the 
result  of  their  economic  and  social  surroundings ;  but  if  one 
were  studying  human  sharks,  one  might  reach  just  the  opposite 
conclusion.  As  a  matter  of  fact,  those  are  the  conclusions,  in 
general,  which  students  actually  reach  who  study  two  different 
types  of  people.  When  we  study  considerable  numbers  of  the 
unfortunate  people  who  have  not  succeeded  in  life,  or  who  are 
more  or  less  complete  failures,  we  generally  attribute  their 
failures  to  bad  surroundings  or  unfortunate  circumstances. 
When  we  study  men  who  have  made  conspicuous  successes,  we 
are  likely  to  attribute  their  successes  to  their  own  sterling  quali- 
ties. It  would  be  impossible  to  say  whether  the  circumstances 
under  which  the  former  class  grew  up  were  better  or  worse 
than  those  under  which  the  latter  class  grew  up.  In  fact, 
many  of  our  greatest  men  and  women  came  out  of  the  worst 
conditions. 

The  unemployed.  If  we  begin  with  the  involuntarily  idle  (that 
is,  the  unemployed,  as  given  in  the  outline  on  page  87)  we  shall 
find  that  many  of  them  are  the  victims  of  circumstances  which 
they  lacked  the  strength  to  combat  successfully.  Frequently 
the  hostile  circumstances  have  been  such  as  no  one  could  stand 
against.  In  these  cases  no  moral  problem  is  involved.  They 
are  entitled  to  all  the  sympathy  and  aid  which  society  can  give 
them.  In  other  cases  it  was  their  own  weakness  or  their  own 
injurious  habits  which  made  them  unemployable.  There  is  no 
doubt  that  better  moral  and  religious  teaching  would  have 
given  them  a  moral  brace  and  helped  them  to  succeed.  At 
any  rate,  the  fact  that  they  are  now  idle  means  that  they  are 
going  to  waste  and  are  a  drain  upon,  rather  than  a  contribution 
to,  the  national  prosperity,  power,  and  greatness.  Anything 
which  can  be  done  for  future  generations  to  reduce  the  number 
of  such  unemployed  people  will  be  a  definite  contribution  to 
the  strength  of  the  nation.  More  moral  vigor,  sounder  habits, 


90  PRINCIPLES  OF  NATIONAL  ECONOMY 

and  better  training  are  apparently  needed  for  our  economic 
prosperity  as  well  as  for  purely  moral  or  religious  reasons. 

The  leisure  class.  When  we  come  to  deal  with  the  volun- 
tarily idle  (that  is,  with  the  leisure  class)  we  are  on  more  cer- 
tain ground.  It  is  in  no  sense  their  misfortune,  it  is  their  fault, 
that  they  are  idle.  The  fact  that  they  are  voluntarily  rather 
than  involuntarily  idle  implies  that  they  could  do  something 
useful  if  they  chose,  but  they  do  not  choose  to  do  so.  It  is  not 
opportunity  which  they  need ;  it  is  moral  regeneration. 

We  must  be  careful,  however,  not  to  confuse  the  person  who 
does  not  have  to  earn  his  living  with  the  person  who  is  idle. 
Many  persons  of  independent  means  are  doing  work  of  the  very 
highest  utility  to  the  nation  and  to  the  world.  Scientific  investi- 
gation, experimentation,  and  invention,  historical  and  literary 
study,  agricultural  and  mechanical  demonstration,  political  re- 
form, and  philanthropy  have  all  been  promoted  by  men  and 
women  who  could  afford  to  give  their  time  to  such  things.  The 
leisure  class,  properly  so  called,  includes  only  those  who  do 
little  or  nothing  that  is  useful  or  productive,  but  give  them- 
selves over  to  mere  self-enjoyment  or  self-cultivation.  Self- 
cultivation  as  preparation  for  useful  work  is  itself,  of  course, 
useful;  but  without  some  useful  object  in  view  (that  is,  with- 
out a  view  to  making  oneself  a  contributor  to  the  national 
prosperity  and  well-being)  it  is  useless.  The  person  who 
spends  his  time  in  this  kind  of  self-cultivation  is  going  to  waste 
as  truly  as  though  he  were  spending  his  time  in  eating,  drink- 
ing, and  acquiring  adipose  tissue,  gout,  or  diabetes. 

Whoever  belongs  to  the  leisure  class  as  thus  defined  is  a 
drain  upon  the  wealth  and  prosperity  of  the  nation.  The  nation 
is  better  off  every  time  such  a  person  leaves  the  world.  Since 
he  does  nothing  useful,  nothing  is  lost  when  he  ceases  to  exist. 
When  he  ceases  consuming,  his  food  and  clothing  at  least  are 
saved.  His  wealth,  of  course,  remains  behind  even  after  he  is 
gone.  He  came  into  the  world  naked,  and  when  he  leaves  the 
world  he  takes  nothing  with  him.  The  more  such  people  there 
are  in  the  nation  in  proportion  to  the  workers  the  worse  it  is 


CONTROL  OF  ECONOMIC  ACTIVITIES  91 

for  the  nation  in  the  long  run.  The  fewer  such  people  there 
are  (that  is,  the  larger  the  proportion  of  workers)  the  better  off 
the  nation  will  be  in  the  long  run.  The  whole  nation  has  to  be 
supported  by  the  labor  of  those  who  work.  If  all  the  people 
work,  the  task  is  lightened  or  else  the  people  live  better.  If 
only  a  part  of  them  work,  either  the  burden  upon  the  workers 
is  heavier  or  else  there  is  less  produced  and  consequently  less 
wealth. 

Do  idle  consumers  make  a  market  for  producers  ?  It  is  some- 
times argued,  however,  that  a  large  number  of  consumers  who 
are  not  themselves  producers  is  necessary  to  make  a  market  for 
the  producers.  An  appearance  of  reasonableness  is  given  to 
this  argument  by  taking  the  case  of  a  single  product,  say 
potatoes,  though  any  other  product  would  do  equally  well.  It 
is  undoubtedly  a  good  thing  for  the  potato  growers  to  have  a 
large  number  of  consumers  of  potatoes  who  are  not  themselves 
growers  of  potatoes,  provided  the  consumers  have  something  to 
give  in  exchange  for  potatoes.  If  the  would-be  consumers  of 
potatoes  do  not  have  something  to  give  in  exchange,  the  grow- 
ers will  gain  nothing  from  them.  The  more  the  consumers  have 
which  can  be  given  in  exchange,  the  more  profitable  it  is  likely 
to  be  for  the  potato  growers.  If  the  consumers  of  potatoes  are 
living  on  accumulated  wealth,  they  will  have  less  to  give  in 
exchange  than  they  would  have  if,  in  addition  to  their  accu- 
mulated wealth,  they  were  also  producing  or  earning  something. 
The  more  workers  there  are  in  other  productive  fields  besides 
potato  growing,  the  more  other  things  there  will  be  to  be  given 
in  exchange  for  potatoes.  This  is  a  statement  which  can  be 
repeated  with  respect  to  each  and  every  industry  or  occupation, 
which  merely  brings  us  back  to  the  general  statement  that  the 
more  workers  and  the  fewer  idlers  there  are  in  any  nation,  the 
more  abundant  will  goods  of  all  kinds  become  and  the  more 
rapidly  will  the  nation  advance  in  prosperity  and  power.  Over- 
production of  everything  is  an  impossibility. 

Some  are  willing  to  grant,  however,  that  it  would  be  better 
economically  if  everyone  would  work  than  it  would  be  if  some 


92 


PRINCIPLES  OF  NATIONAL  ECONOMY 


wasted  their  time  in  idleness.  After  admitting  this,  it  will  be 
asked,  nevertheless,  Has  not  a  man  a  right  to  remain  idle  if 
he  has  accumulated  enough  to  support  himself  without  further 
work  ?  Assuming  that  he  has  earned  his  accumulation  and  has 
not  secured  it  by  inheriting  it,  by  marrying  it,  or  by  a  fortunate 
speculation  in  land,  there  is  something  to  be  said  for  this  con- 
tention. But  he  who  does  less  well  than  he  can,  does  ill.  One 
who  is  still  capable  of  doing  useful  work  and  chooses  not  to  do 
it  is  certainly  doing  less  well  for  his  country  than  he  might,  even 
though  he  did  well  when  he  accumulated  wealth. 

Should  men  be  allowed  to  accumulate  wealth  ?  But  why  rely 
upon  morals  and  religion  to  prevent  this  form  of  waste  or  ill- 
doing?  Why  not  prevent  men  from  living  in  idleness  by  for- 
bidding them  to  accumulate  wealth  or  by  taking  it  away  from 
them  by  law  if  they  do  so  ?  Here  is  a  dilemma  which  no  kind 
of  compulsion  can  remove.  If  men  are  not  allowed  to  accu- 
mulate wealth,  they  will  then  be  encouraged  to  consume  their 
incomes  as  they  go  along.  Wasteful  or  luxurious  consumption 
is  quite  as  wasteful  as  idleness.  Here,  then,  is  the  dilemma. 
If  men  whose  incomes  are  larger  than  is  necessary  to  support 
them  and  their  families  in  that  degree  of  comfort  which  will 
maintain  their  efficiency  at  its  maximum  are  not  allowed  to 
accumulate,  they  will  consume  more  than  is  necessary ;  that  is, 
they  will  consume  wastefully.  If  they  are  allowed  to  accu- 
mulate a  part  of  their  incomes,  some  of  them  will  be  able  to 
accumulate  so  much  that  either  they  or  their  children  may  live 
without  work.  It  is  deemed  better  and  more  economical  to 
allow  them  to  accumulate  and  then  appeal  to  them  on  moral 
and  religious  grounds  not  to  waste  their  lives  in  idleness  or  use- 
less self-amusement,  but  to  use  both  their  time  and  their  wealth 
productively,  than  to  take  away  their  accumulations  and  thus 
encourage  them  to  consume  wastefully. 

Let  us  assume,  by  way  of  illustration,  that  two  men,  A  and 
B,  have  equal  incomes,  and  that  their  incomes  are  more  than 
sufficient  to  maintain  them  and  their  families  in  efficient  com- 
fort. A  consumes  his  entire  income  and  never  accumulates 


93 

anything,  while  B  consumes  only  a  part  of  his  income,  investing 
the  remainder  in  productive  enterprises  of  various  kinds.  The 
overconsumption  of  A  and  his  family  accomplishes  nothing. 
What  they  consume  over  and  above  that  which  is  necessary  for 
efficient  comfort  is  wasted  as  far  as  the  rest  of  the  country  is 
concerned  and  might  just  as  well  have  been  burned  or  thrown 
into  the  sea,  if  that  would  have  given  them  any  amusement 
or  satisfaction.  B's  surplus,  however,  has  gone  into  the  expan- 
sion of  industries  and  the  increase  of  the  productive  power  of 
the  country.  Up  to  this  point  B  has  done  much  better  than  A. 
Now  let  us  assume  that  after  a  period  of  years  B  decides  that 
he  has  worked  long  enough  and  that  he  will  spend  the  rest  of 
his  life  in  sheer  idleness  or  self-amusement.  A,  having  accumu- 
lated nothing,  cannot  retire,  but  is  compelled  to  go  on  working 
as  long  as  he  is  able.  From  this  point  on,  A  is  doing  better  than 
B.  During  their  whole  lives  it  is  difficult  to  say  which  does 
the  better,  but  the  odds  are  slightly  in  favor  of  B.  If,  however, 
B  can  be  persuaded  not  to  remain  idle,  but  to  continue  doing 
something  useful,  even  if  he  does  give  up  his  earlier  business, 
the  advantage  is  decidedly  with  B. 

The  kind  of  talent  that  goes  to  waste.  There  is  one  aspect 
of  the  problem  of  the  leisure  class  which  makes  it  especially 
important.  That  is  the  quality  of  the  people  of  whom  it  is 
made  up.  If  this  class  were  made  up  of  the  ignorant,  the  weak, 
and  the  incompetent,  the  loss  would  not  be  so  great.  That 
part  of  the  leisure  class  which  is  commonly  referred  to  as  the 
tramp,  or  hobo,  class  may  be  thus  described.  There  is  a  certain 
amount  of  waste  involved  here ;  but  as  long  as  they  do  not  be- 
come a  positive  nuisance  by  their  lawlessness  and  vagrancy, 
the  waste  is  not  so  very  gr,eat.  Even  if  they  were  all  at  work, 
they  would  not  be  worth  much ;  consequently  the  mere  fact 
that  they  are  idle  does  not  of  itself  occasion  much  loss.  Their 
criminality  is,  of  course,  another  matter. 

That  which  is  commonly  known  as  the  leisure  class,  however, 
differs  from  the  vagrant  class  in  at  least  one  important  partic- 
ular. It  is  made  up  in  the  main  of  men  and  women  of  more 


94 


PRINCIPLES  OF  NATIONAL  ECONOMY 


than  average  native  capacity.  The  man,  for  example,  who 
has  been  able  to  accumulate  a  fortune  out  of  his  own  earnings, 
or  by  his  own  business  foresight  and  capacity,  is  pretty  certain 
to  be  a  man  of  considerable  productive  capacity.  If  he  chooses 
to  use  that  capacity  in  productive  enterprises,  he  can  add 
materially  to  the  wealth  and  prosperity  of  the  whole  com- 
munity. If  he  chooses  not  to  use  it,  the  loss  to  the  community 
is  correspondingly  great.  These  considerations  present  a  prob- 
lem of  the  very  greatest  magnitude.  The  greater  the  productive 
capacity  of  the  individual,  the  more  desirable  it  is,  from  the 
standpoint  of  national  prosperity,  that  he  shall  use  that  capac- 
ity. On  the  other  hand,  the  greater  his  capacity,  the  more 
likely  he  is  to  accumulate  a  fortune  and,  consequently,  if  he 
is  not  controlled  by  high  moral  and  religious  motives,  the  more 
likely  he  is  to  retire  from  business  and  live  in  idleness.  If  he 
were  a  man  of  low  productive  capacity,  it  would  not  be  so  great 
a  loss  if  he  were  to  retire  ;  but  such  a  man  will  seldom  be  able  to 
accumulate  a  sufficient  fortune  to  be  able  to  retire. 

Lest  there  should  remain  some  doubt  as  to  whether  it  is  a 
loss  to  society  when  a  man  of  great  capacity  for  usefulness 
stops  working,  let  us  consider  the  case  of  a  great  surgeon. 
The  author  has  such  a  man  in  mind.  He  is  so  skillful  and  so 
capable  that  his  services  are  sought  by  large  numbers  of  people. 
He  could  have  retired  years  ago  and  lived  in  elegant  leisure 
on  his  accumulated  wealth.  Had  he  chosen  to  do  so  some 
hundreds  of  people  would  have  been  deprived  of  the  benefit  of 
his  skill.  Had  he  been  a  man  of  mediocre  ability  it  would  not 
have  mattered  much ;  but  a  man  of  mediocre  ability  could  not 
have  accumulated  enough  to  be  able  to  stop  working.  The 
fact  that  this  brilliant  surgeon  is  so  much  needed  is  the  very 
thing  which  would  have  made  it  possible,  if  he  had  been  a  man 
of  perverted  morals,  to  stop  working;  but  that  is  the  very 
reason  why  he  should  not  stop.  There  seems  to  be  no  solution 
of  the  problem,  except  sound  moral  standards,  which  will 
keep  such  men  busy.  If  they  lack  such  sound  moral  standards, 
even  compulsion  would  not  call  forth  their  best  efforts.  That 


CONTROL  OF  ECONOMIC  ACTIVITIES  95 

which  has  been  said  of  our  great  surgeon  may  be  repeated 
of  any  great  man  in  any  useful  occupation. 

The  ineffectively  employed.  By  the  ineffectively  employed 
are  meant  all  those  who,  through  lack  of  training,  lack  of 
opportunity,  or  sheer  lack  of  initiative,  are  now  doing  less 
useful  work  than  they  might  have  been  doing  had  they  had 
the  proper  training,  opportunity,  and  initiative.  These  include 
men  who  are  doing  unskilled  work  who  might  have  been  doing 
skilled  work,  men  doing  skilled  manual  work  who  might  have 
been  doing  expert  mental  work,  or  men  doing  routine  mental 
work  who  might  have  been  doing  work  requiring  inventiveness, 
originality,  and  enterprise.  This  is  primarily  an  educational 
rather  than  a  moral  problem.  The  question  of  morals  and  reli- 
gion enters  into  the  problem  to  a  certain  extent,  however.  No 
matter  how  many  and  excellent  the  schools  and  other  educa- 
tional opportunities,  unless  students  are  inspired  with  a  high 
purpose  to  make  use  of  the  opportunities  which  are  furnished, 
these  opportunities  alone  will  not  solve  the  problem.  Large 
numbers  will  remain  unskilled,  ignorant,  and  in  a  low  state  of 
productivity.  The  individual  who  remains  less  useful  to  the 
nation  than  he  might  be  is  not  only  doing  himself  an  injury  but 
is  also  injuring  the  nation.  He  who  does  less  well  than  he  can, 
does  ill. 

Vice  as  waste  of  energy.  One  very  good  definition  of  a  vice 
is  that  it  is  a  habit  which  wastes  or  dissipates  human  energy. 
It  should,  perhaps,  be  distinguished  from  crime  in  that  vice 
wastes  one's  own  energy,  whereas  crime  wastes  not  only  one's 
own  but  that  of  other  people  besides.  No  community  which 
wastes  in  either  way  a  large  proportion  of  its  energy  can  hope  to 
prosper  as  much  as  a  community  which  does  not.  The  use  of 
drugs  which  merely  produce  excitation  or  irritation  of  the 
nerves,  overindulgence  in  any  kind  of  excitement  beyond  what 
is  necessary  for  recreation,  or  even  excessive  devotion  to  sport 
may  become  a  vice  in  this  sense  as  truly  as  excessive  eating 
or  drinking.  Crime  and  fraud  seem  to  call  for  the  use  of  the 
compulsory  power  of  the  state  rather  than  for  moral  suasion. 


96  PRINCIPLES  OF  NATIONAL  ECONOMY 

Luxury.  Luxurious  consumption  can  be  controlled  by  au- 
thority and  compulsion  to  a  certain  extent,  but  not  wholly  ;  that 
is  to  say,  there  are  certain  clear  and  undebatable-  forms  of 
luxurious  consumption,  such  as  the  use  of  alcohol  and  opium, 
which  the  government  can  safely  prohibit,  but  much  must  be 
left  to  the  discretion  of  the  individual.  There  is  a  time-worn 
argument  to  the  effect  that  luxurious  expenditure  gives  employ- 
ment to  labor  and  thus  benefits  the  poor.  This  is  similar  in 
principle  to  the  theory  that  the  destruction  of  property,  say  the 
burning  of  a  building  or  the  breaking  of  a  window,  gives  em- 
ployment to  labor.  The  stupidity  of  this  argument  was  never 
more  clearly  shown  than  by  Frederic  Bastiat  in  his  famous 
work  entitled  "Sophisms  of  Political  Economy."  He  pictures 
a  shopkeeper  who  is  about  to  chastise  a  scapegrace  son  who  has 
broken  a  pane  of  glass.  Some  sympathetic  bystanders  argue 
that  the  boy  is  really  a  public  benefactor  in  that  he  has  made 
work  for  the  glazier,  who  will  then  have  six  francs,  the  cost  of 
a  new  pane,  to  spend,  and  that  the  butcher,  the  baker,  and 
others  will  share  in  the  benefit. 

Assuming  that  it  becomes  necessary  to  spend  six  francs  in  repairing 
the  damage,  if  you  mean  to  say  that  the  accident  brings  in  six  francs 
to  the  glazier,  and  to  that  extent  encourages  his  trade,  I  grant  it 
fairly  and  frankly,  and  admit  that  you  reason  justly. 

The  glazier  arrives,  does  his  work,  pockets  his  money,  rubs  his 
hands,  and  blesses  the  scapegrace  son.  That  is  what  we  see. 

But  if,  by  way  of  deduction,  you  come  to  conclude,  as  is  too  often 
done,  that  it  is  a  good  thing  to  break  windows,  that  it  makes  money 
circulate,  and  that  encouragement  to  trade  in  general  is  the  result, 
I  am  obliged  to  cry,  halt !  Your  theory  stops  at  what  we  see,  and 
takes  no  account  of  what  we  don't  see. 

We  don't  see  that  since  our  burgess  has  been  obliged  to  spend 
his  six  francs  on  one  thing,  he  can  no  longer  spend  them  on  another. 

We  don't  see  that  if  he  had  not  this  pane  to  replace,  he  would 
have  replaced,  for  example,  his  shoes,  which  are  down  at  the  heels ; 
or  have  placed  a  new  book  on  his  shelf.  In  short,  he  would  have 
employed  his  six  francs  in  a  way  in  which  he  cannot  employ  them 


CONTROL  OF  ECONOMIC  ACTIVITIES  97 

now.  Let  us  see  then  how  the  account  stands  with  trade  in  general. 
The  pane  being  broken,  the  glazier's  trade  is  benefited  to  the  extent 
of  six  francs.  That  is  what  we  see. 

If  the  pane  had  not  been  broken,  the  shoemaker's  or  some  other 
trade  would  have  been  encouraged  to  the  extent  of  six  francs.  That 
is  what  we  don't  see.  And  if  we  take  into  account  what  we  don't 
see,  which  is  a  negative  fact,  as  well  as  what  we  do  see,  which  is 
a  positive  fact,  we  shall  discover  that  trade  in  general,  or  the  aggre- 
gate of  national  industry,  has  no  interest,  one  way  or  the  other, 
whether  windows  are  broken  or  not. 

Let  us  see,  again,  how  the  account  stands  with  Jacques  Bonhomme. 
On  the  last  hypothesis,  that  of  the  pane  being  broken,  he  spends 
six  francs,  and  gets  neither  more  nor  less  than  he  had  before,  namely, 
the  use  and  enjoyment  of  a  pane  of  glass.  On  the  other  hypothesis, 
namely,  that  the  accident  had  not  happened,  he  would  have  expended 
six  francs  on  shoes  and  would  have  had  the  enjoyment  both  of  the 
shoes  and  the  pane  of  glass. 

Now  as  the  good  burgess,  Jacques  Bonhomme,  constitutes  a  frac- 
tion of  society  at  large,  we  are  forced  to  conclude  that  society,  taken 
in  the  aggregate,  and  after  all  accounts  of  labor  and  enjoyment  have 
been  squared,  has  lost  the  value  of  the  pane  which  has  been  broken. 

In  one  respect  the  argument  against  luxury  is  less  strong  than 
that  against  the  breaking  of  a  pane  of  glass,  but  in  another  re- 
spect it  is  stronger.  When  the  shopkeeper  in  the  story  has  to 
spend  six  francs  on  a  pane  of  glass,  he  gets  no  satisfaction  out 
of  it  and  deprives  himself  of  a  pair  of  shoes  which  he  needs. 
Had  he  spent  the  six  francs  on  a  luxury,  he  would  presumably 
have  got  some  enjoyment  out  of  it,  even  though  it  had  been 
followed  by  indigestion  or  a  headache.  To  this  extent  it  would 
have  been  better  to  have  a  luxury  costing  six  francs  than  to 
have  been  compelled,  through  the  carelessness  of  an  overexu- 
berant  son,  to  spend  that  amount  on  a  pane  of  glass.  On  the 
other  hand,  when  one  compares  the  expenditure  of  money  for 
a  luxury  with  the  investment  of  money  in  tools  or  other  instru- 
ments of  production,  one  does  not  get  so  favorable  a  picture. 
When  one  spends  money  for  a  luxury,  one  does,  it  is  true,  set 


98  PRINCIPLES  OF  NATIONAL  ECONOMY 

labor  to  work,  in  a  luxury-producing  industry ;  but  if  one  were 
to  spend  the  same  amount  of  money  for  tools,  one  would  set  an 
equal  quantity  of  labor  to  work  in  a  tool-producing  industry. 
It  is  at  least  as  desirable  to  give  work  to  tool-makers  as  to 
luxury  producers.  In  fact,  it  is  much  more  desirable.  The  more 
men  there  are  working  in  tool-making  industries,  the  better  sup- 
plied with  tools  the  nation  will  be.  The  way  they  are  set  to 
work  is  by  the  purchase  of  tools ;  that  is,  by  the  investment  of 
money  in  tools. 

If  you  have  a  dollar  to  spend  over  and  above  what  is  neces- 
sary to  maintain  you  in  efficient  comfort,  you  have  your  choice 
of  spending  it  on  some  unnecessary  article  of  consumption  or 
of  investing  it  in  some  productive  enterprise.  Whether  it  be  a 
dollar  or  a  hundred  thousand  dollars,  the  principle  is  the  same. 
If  you  decide  to  invest  your  money  in  a  productive  enterprise, 
you  tend,  to  the  extent  of  your  investment,  to  set  labor  to  work 
erecting  the  buildings  or  manufacturing  the  machines  which 
will  be  needed  in  production.  The  more  people  there  are  who 
are  investing  in  this  way,  and  the  more  they  invest,  the  more 
productive  enterprises  we  shall  have.  This  not  only  sets  labor 
to  work  preparing  the  buildings  and  machinery  but  will  con- 
tinue to  employ  labor  to  run  the  enterprises.  Again,  as  a  result 
of  this,  more  goods  are  produced  and  the  nation  is  better  fed, 
clothed,  and  supplied  with  all  necessaries.  It  is,  therefore,  very 
much  better  that  there  should  be  a  great  many  people  investing 
their  money  productively  than  that  they  should  merely  spend 
their  money  for  extravagant  luxuries  which  are  of  no  use  to 
anyone  except  themselves.  He  who  does  less  well  with  his 
money  than  he  might  do  is  doing  badly.  He  therefore  does 
badly  who  spends  his  money  luxuriously  when  he  might  invest 
it  productively. 

Emulation  in  extravagance.  Nothing  could  contribute  more 
to  the  general  prosperity  and  well-being  of  the  nation  than  such 
moral  habits  as  would  discourage  extravagant  consumption  and 
encourage  thrift  and  wise  investments  in  all  sorts  of  productive 
enterprises.  A  particularly  vicious  and  wasteful  factor  in  many 


CONTROL  OF  ECONOMIC  ACTIVITIES  99 

a  social  group  is  competition  or  emulation  in  extravagance. 
What  Professor  Thorstein  Veblen1  has  called  "conspicuous 
waste"  is  sometimes  required  of  everyone  with  social  ambitions. 
Of  all  forms  of  competition,  competitive  consumption  is  the 
most  pernicious  and  wasteful.  When  men  and  women  try  to 
advertise  their  solvency  by  ostentatious  wastefulness,  there 
develops  a  real  competition  to  see  who  can  advertise  most 
effectively. 

This  is  part  of  a  very  widespread  tendency.  Certain  Chinese 
mandarins  of  an  older  day  used  to  allow  their  finger  nails  to 
grow  to  inordinate  lengths  as  a  visible  sign  that  they  did  not 
have  to  work.  The  binding  of  the  feet  of  women  served  much 
the  same  purpose.  Where  work  is  not  regarded  as  respectable, 
some  visible  sign  of  respectability  is  generally  sought.  Some- 
times these  customs  are  copied  even  by  those  who  do  have  to 
work,  as  in  the  case  of  high-heeled  shoes  and  of  long  trains. 

Emulation  in  the  waste  of  physical  energy.  It  is  not  only  the 
possession  of  plenty  of  money  which  is  thus  vulgarly  advertised. 
The  possession  of  abounding  physical  energy  is  also  advertised 
by  the  practice  of  conspicuous  vices  which  tend  to  dissipate 
energy.  The  young  man  who  can  dissipate  freely  can  thus 
advertise  to  the  world  that  he  has  recently  come  into  possession 
of  health  and  energy  and  now  has  them  to  spare,  just  as  one  of 
the  newly  rich  can  advertise  to  the  world  that  he  has  money 
to  spare  when  he  spends  it  extravagantly.  When  there  is  no 
sense  of  moral  values  and  no  sober  self-restraint,  the  possession 
of  abundant  health  and  the  possession  of  abundant  money  lead 
to  equally  demoralizing  vices.  The  poor  are  safeguarded  by 
their  poverty  from  the  extravagant  use  of  money,  but  they  are 
quite  as  likely  to  indulge  in  the  extravagant  uses  of  vitality  as 
are  the  rich.  If  there  be  any  difference,  the  dissipation  of 
physical  energy  is  worse  than  the  dissipation  of  money. 

The  teacher,  the  preacher,  or  the  moral  leader  who  can 
persuade  the  people  to  abandon  such  habits  and  use  their  sur- 
plus money  and  their  surplus  energy  productively  rather  than 

xThe  Theory  of  the  Leisure  Class. 


100  PRINCIPLES  OF  NATIONAL  ECONOMY 

wastefully  will  deserve  to  stand  among  the  greatest  of  states- 
men and  nation  builders.  Nations  are  built  by  the  wise  ex- 
penditure of  human  energy.  The  less  it  is  wasted,  and  the  more 
it  is  used  up  in  productive  or  useful  work,  the  greater  the 
progress  of  the  nation. 

We  have  chosen  to  discuss,  in  this  chapter,  a  theme  which 
is  not  ordinarily  treated  in  works  on  economics.  It  has  gen- 
erally been  assumed  that  economics  has  nothing  to  do  with 
morals  and  religion.  With  certain  sentimental  and  conven- 
tional aspects  of  these  human  interests,  perhaps,  the  economist 
has  nothing  to  do.  But  in  so  far  as  they  are  factors,  or  may 
become  factors,  in  national  wealth,  prosperity,  and  power, 
nothing  can  be  of  more  interest  to  the  economist.  Even  re- 
ligion, if  it  stimulates  the  productive  virtues  and  discourages 
the  vices  which  waste  and  dissipate  human  energy,  may  become 
one  of  the  greatest  factors  in  the  building  of  a  great,  prosperous, 
and  powerful  nation.  The  nation  which  possesses  such  a  re- 
ligion will  eventually  outgrow  in  all  these  particulars  the  nation 
which  does  not,  or  which  possesses  a  religion  which  enervates, 
which  lulls  to  sleep,  or  which  represses  the  productive  virtues.1 

1  For  a  fuller  discussion  of  this  topic,  see  the  author's  book  entitled  "  The 
Religion  Worth  Having."  Houghton  Mifflin  Company,  Boston,  1912. 


.»'*» 


CHAPTER  VI 
ECONOMIC  INSTITUTIONS 
I.    VOLUNTARY  AGREEMENT 

Compulsion  and  government.  The  most  important  character- 
istic of  the  economic  life  of  civilized  people  is  its  freedom  from 
compulsion.  Nearly  every  economic  act  of  the  average  in- 
dividual is  one  which  he  does  voluntarily.  Even  when  he  is 
under  compulsion,  it  is  usually  found  to  be  for  one  of  a  very 
few  reasons.  It  may  be  to  prevent  him  from  using  violence  or 
fraud  against  someone  else.  It  may  be  to  compel  him  to  carry 
out  an  agreement  into  which  he  has  voluntarily  entered.  He 
may  be  compelled  to  pay  taxes,  and  he  is  sometimes  compelled 
to  perform  military  and  other  service.  The  striking  fact  about 
all  these  and  all  other  cases  of  compulsion  which  are  tolerated 
by  civilized  people  is  that  they  are  all  exercised  by  the  govern- 
ment. Among  all  free  people  one  private  citizen  is  forbidden 
to  exercise  compulsion  over  any  other.  That  is  a  work  which 
is  reserved  exclusively  for  the  government  through  its  officers. 
"Compulsion  is  mine;  I  will  compel,"  says  the  government. 

Dangers  of  compulsion.  The  power  of  compulsion  is  danger- 
ous, and  its  exercise  is  generally  regarded  with  disfavor.  It 
seems  impossible,  however,  for  large  numbers  of  people  of  all 
kinds,  classes,  and  degrees  of  intelligence  and  reasonableness 
to  get  along  together  without  some  umpire  to  decide  disputes 
and  enforce  his  decisions.  This  means  that  there  must  be  some- 
where a  power  of  compulsio^  ;  that  is,  the  power  to  compel  men, 
by  physical  force  if  necessary,  sometimes  to  do  some  things 
which  they  would  prefer  not  to  do,  and  to  leave  undone  things 
which  they  would  prefer  to  do.  This  power,  however,  is  very 
carefully  safeguarded.  It  is  safeguarded  first  by  being  with- 

IOI 

LiSSASY 

UNIVERSITY  OF  CALIFORNIA 
RIVERSIDE 


102  PRINCIPLES  OF  NATIONAL  ECONOMY 

held  from  everybody  except  the  authorized  agents  of  govern- 
ment. Even  they  are  very  carefully  hedged  about  and  com- 
pelled to  proceed  in  careful  and  orderly  ways  in  exercising 
compulsion.  We  have  an  elaborate  system  of  rules  for  the 
settlement  of  disputes  and  especially  for  the  collection  and 
weighing  of  evidence  in  cases  of  alleged  crime.  The  accused 
person  is  so  carefully  safeguarded  that  it  is  very  difficult  to  con- 
vict him  unless  the  evidence  of  his  guilt  is  beyond  reasonable 
question. 

The  ballot  as  a  necessary  check  upon  the  power  of  compulsion. 
Back  of  all  these  rules  and  regulations  of  court  procedure  and 
of  government  administration  we  have  the  system  of  balloting 
as  a  check  upon  those  who  govern  us.  With  the  ballot  in  our 
hands,  even  the  government  itself  cannot  use  more  compulsion 
than  the  majority  of  us  are  willing  that  it  should  use.  The 
ballot  is  our  ultimate  safeguard  against  abuses  of  that  power  of 
compulsion  which  must  be  exercised  by  governments.  It  is  a 
most  important  weapon  of  defense,  but  its  importance  is  due  to 
the  fact  that  government  officers  possess  the  power  of  com- 
pulsion, and,  though  it  is  a  necessary  power,  it  is  the  most 
dangerous  power  that  any  human  being  can  possess.  It  is  so 
dangerous  that  in  a  free  country  it  is  positively  forbidden  to 
private  individuals,  and  even  the  government  officers,  who 
exist  partly  for  the  purpose  of  preventing  private  individuals 
from  exercising  compulsion,  are  permitted  to  exercise  it  only 
under  the  most  careful  safeguards. 

Contract.  One  of  the  greatest  discoveries  of  the  human  intel- 
lect is  that  large  enterprises  can  be  carried  out  by  voluntary 
agreement  among  free  citizens.  Where  enterprises  can  be 
carried  out  by  this  method  they  are  found  to  be  carried  out 
more  effectively  and  economically  than  under  compulsion.  It 
is  true,  however,  that  there  are  som|  things  that  cannot  be  done 
by  voluntary  agreement.  In  order  that  the  government,  a  com- 
pulsory organization,  may  pay  its  bills,  it  cannot  rely  wholly 
upon  voluntary  gifts ;  it  must  use  compulsion  to  collect  taxes. 
If  a  great  war  is  to  be  fought,  it  is  not  only  necessary  to  levy 


ECONOMIC  INSTITUTIONS  103 

compulsory  contributions  to  pay  the  expenses  of  the  war,  it 
may  be  necessary  to  resort  to  conscription  to  recruit  its  armies. 
The  army  itself  in  the  actual  process  of  fighting  has  to  act 
under  a  centralized  command.  Authority  and  obedience,  there- 
fore, rather  than  voluntary  agreement  among  equals,  is  the  basis 
of  all  military  organizations.  It  would  be  quite  possible  to 
organize  industry  on  the  same  basis ;  that  is,  to  levy  compulsory 
contributions  to  support  the  industries,  to  conscript  labor  to 
man  them,  and  to  have  everything  done  by  authority  and  obe- 
dience rather  than  by  contract  or  voluntary  agreement.  The 
experience  of  the  world,  however,  has  shown  that  those  coun- 
tries that  have  tried  to  run  their  industries  primarily  or  even 
largely  on  a  basis  of  authority  and  obedience  have  not  prospered 
quite  so  much  as  those  that  have  given  a  large  measure  of  free- 
dom from  compulsion  and  have  permitted  industries  to  be 
organized  on  the  basis  of  voluntary  contracts  and  agreements. 
Even  people  who,  in  the  abstract,  disapprove  of  the  system  of 
voluntary  agreement  usually  prefer  to  live  in  those  countries 
where  this  is  the  rule  and  are  glad  to  emigrate  from  those  where 
authority  and  obedience  are  the  rule. 

Repression  of  violence.  In  order  that  there  may  be  the 
largest  possible  opportunity  for  voluntary  agreements  among 
free  citizens,  it  is  absolutely  necessary  that  no  private  citizen 
shall  be  allowed  to  compel  any  other  citizen  to  do  anything 
against  his  will.  If  that  were  permitted,  the  system  of  volun- 
tary agreement  would  suffer  a  great  setback.  But  if  you  are 
prevented  from  exercising  any  compulsion  over  your  neighbor, 
you  will  not  be  able  to  get  him  to  do  anything  for  you,  to  pro- 
duce anything  which  you  would  like  to  have,  or  to  give  you 
anything  in  his  possession  except  by  his  full  and  free  consent. 
You  are  then  reduced  to  the  necessity  of  persuading  him  to 
do  voluntarily  what  you  otherwise  might,  if  you  were  strong 
enough,  compel  him  to  do. 

Property  follows  freedom  from  violence.  It  cannot  be  too 
much  emphasized  that  property  exists  automatically  and  neces- 
sarily in  any  group  where  the  individual  is  safeguarded  against 


104  PRINCIPLES  OF  NATIONAL  ECONOMY 

violence.  If  he  is  safeguarded  against  violence,  he  may  hold 
anything  in  his  possession  until  he  sees  fit  to  give  it  up  of  his 
own  free  will.  If  anyone  who  tries  to  dispossess  him  by  violence 
is  promptly  repressed  by  the  group,  that  very  act  on  the  part  of 
the  group  safeguards  him  in  his  possession, — it  transforms  his 
possession  into  property.  In  short,  the  essence  of  property  ex- 
ists instantly,  automatically  and  necessarily,  as  soon  as  violence 
is  repressed.  Nothing  but  force  or  violence  either  destroys 
private  property  or  seriously  limits  it.  Practically  every  limita- 
tion that  exists  or  ever  can  exist  in  the  absolute  right  of  prop- 
erty is  due  either  to  the  failure  of  the  group  to  protect  the 
individual  against  some  infringement  or  to  the  exercise  of  force 
or  authority  by  the  group  itself  to  limit  the  individual's  power 
over  his  possessions.  If  we  once  get  this  point  clearly  in  mind, 
and  never  forget  it,  it  will  save  us  from  much  confusion  of 
thought  later  on.  It  is  the  most  important  fact  in  the  institu- 
tional background  of  our  present  economic  organization. 

The  extent  to  which  violence  is  repressed  is  a  fairly  good  test 
of  the  quality  of  our  civilization.  The  most  important  differ- 
ence between  civilization  and  savagery  is  this:  the  civilized 
man  tries  to  prosper  by  making  himself  so  useful  that  others 
will  be  glad  to  reward  him  for  his  usefulness,  while  the  savage 
tries  to  prosper  by  making  himself  so  dangerous  that  others  will 
be  afraid  to  refuse  his  demands.  When  all  citizens  try  to 
prosper  by  the  method  of  usefulness  we  have  the  highest  state 
of  civilization,  but  when  all  try  to  prosper  by  the  method  of 
dangerousness  we  have  the  lowest  state  of  savagery,  and  when 
a  part  of  the  citizens  try  one  method  and  a  part  try  the  other 
we  have  something  between.  Not  many  people  can  live  to- 
gether under  savagery,  because  dangerousness  destroys  rather 
than  supports  life ;  many  can  live  together  under  civilization, 
because  usefulness  supports  rather  than  destroys,  life. 

Property  of  some  kind,  belonging  to  groups  or  to  individuals, 
necessarily  belongs  to  civilization  and  grows  with  civilization, 
because  civilization  is  characterized  by  the  absence  of  violence 
one  toward  another  and  the  prevalence  of  voluntary  agreement 


ECONOMIC  INSTITUTIONS  105 

among  citizens  who  are  free  from  violence.  The  mere  fact  that 
the  law  forbids  you  to  take  by  force  anything  in  the  possession 
of  your  neighbor  creates  in  him,  as  a  by-product  of  your  legal 
restraint,  the  legal  right  of  property  in  the  thing  in  question. 
In  proportion  as  you  are  prevented  by  law  from  using  force 
against  him,  in  that  proportion  is  he  protected  by  law  in  the 
possession  of  the  thing  which  you  might  covet.  This  repression 
of  violence  on  the  part  of  the  government  means,  in  and  of  it- 
self, that  no  one  can  be  dispossessed  of  his  possessions  against 
his  full  and  free  consent.  This  is,  as  stated  before,  the  very 
essence  of  property. 

Repression  of  fraud.  Again,  if  one  citizen  were  permitted 
to  get  some  desirable  service  or  possession  from  another  citizen 
by  deception  or  .fraud,  this  would  not  be  in  harmony  with  the 
system  of  voluntary  agreement  and  would  give  that  system 
almost  as  great  a  setback  as  though  one  were  permitted  to  use 
force.  It  is  understood  that  an  apparent  agreement  is  not 
really  a  voluntary  agreement  unless  its  meaning  is  understood 
by  both  parties.  If  one  is  deceived  and  obviously  does  not 
understand  the  meaning  of  the  quasi  agreement,  it  is  not  a  real 
agreement.  The  prevention  of  fraud  is,  therefore,  essential  to 
the  preservation  of  the  system  of  voluntary  agreement.  The 
suppression  of  violence  and  the  prevention  of  fraud  together 
produce  the  institutions  of  property  and  contract  as  by-products 
of  the  system  of  voluntary  agreement  among  free  citizens. 

Enforcement  of  contracts.  There  would  be  another  serious 
setback  to  the  development  of  the  system  of  voluntary  agree- 
ment if  agreements  were  not  carried  out  or  promises  kept.  If 
you  should  make  a  voluntary  agreement  with  a  fellow  citizen 
and  should  yourself  receive  some  benefit  from  it,  and  then 
should  refuse  to  carry -out  your  part  of  the  agreement  by  which 
he  would  receive  his  expected  benefit,  he  would  be  very  cautious 
about  entering  into  another  agreement  with  you.  If  men  in 
general  were  free  to  withdraw  from  an  agreement  in  this  way, 
they  would  all  be  cautious  about  making  agreements.  In  short, 
the  system  of  voluntary  agreement  could  not  develop  very  far 


106  PRINCIPLES  OF  NATIONAL  ECONOMY 

unless  there  were  some  means  of  compelling  men  to  fulfill  their 
parts  of  the  agreements  which  they  voluntarily  made.  The 
enforcement  of  contracts  is,  therefore,  a  necessary  part  of  the 
system. 

II.  PROPERTY 

Property  a  by-product  of  freedom.  It  is  obvious  that  the  only 
way  in  which  free  men  can  work  together  is  on  the  basis  of 
voluntary  agreement.  The  system  of  voluntary  agreement  is, 
therefore,  a  necessary  product  of  freedom.  It  was  suggested 
above  that  the  institution  of  property  was  in  turn  a  by-product 
of  the  system  of  voluntary  agreement.  There  could  not  be  an 
absence  of  compulsion  without  property,  and  the  existence  of 
the  power  of  compulsion  is  the  only  limitation  there  is  on  prop- 
erty. If  private  individuals  are  permitted  to  use  compulsion 
against  others  with  no  check  or  hindrance  on  the  part  of  gov- 
ernment, there  is  no  such  thing  as  property.  Where  they  are 
forbidden  to  exercise  any  compulsion  one  against  the  other, 
there  is  property.  Where  this  is  true  the  only  limitation  left 
upon  the  right  of  property  is  the  compulsory  power  of  the  gov- 
ernment ;  that  is,  the  government  may  take  property  without 
the  consent  of  the  individual  possessor.  The  more  the  govern- 
ment chooses  to  exercise  this  power,  the  more  it  limits  the 
property  rights  of  individuals. 

The  historical  development  of  the  system  of  voluntary  agree- 
ment has  been  a  slow  process  and  has  been  accompanied  by 
the  equally  slow  development  of  the  institution  of  property. 
There  have  been  a  good  many  attempts  to  trace  the  historical 
development  of  the  institution  of  property  independently  of 
the  underlying  conditions  that  make  property  possible  or  con- 
ceivable. Needless  to  say,  such  attempts  are  of  no  great 
scientific  value. 

Ways  of  acquiring  property.  The  individual  who  has  found, 
picked  up,  or  made  a  thing  which  he  needs,  or  to  which  he  has 
taken  a  fancy,  becomes  the  recognized  owner  of  it  when  organ- 
ized society  undertakes  to  protect  him  against  violence  and 


ECONOMIC  INSTITUTIONS  107 

fraud.  If  this  is  done,  no  one  else  can  dispossess  him  of  it  with- 
out his  consent.  Where  this  is  the  case,  a  person  can  only 
come  into  possession  of  a  thing  by  finding  it,  making  it  him- 
self, or  getting  it  from  someone  else  with  that  person's  consent. 
That  consent  may  be  obtained  in  many  ways,  but  a  very  com- 
mon way  is  to  buy  the  object  of  its  possessor  by  offering  him 
in  exchange  for  it  something  that  he  would  rather  have.  Under 
this  system  it  has  generally  been  held  that  the  finder  of  a  thing 
can  no  more  be  dispossessed  by  violence  than  the  maker  of  a 
thing.  In  other  words,  if  you  have  discovered,  found,  or  picked 
up  some  object  not  hitherto  possessed  by  anybody  else,  you 
cannot  be  dispossessed  of  it  without  your  consent,  which  means 
literally  that  you  own  it.  If  somebody  else  wants  it,  he  can  get 
it  from  you  only  with  your  consent ;  and  that  may  mean,  and 
usually  does  mean,  that  he  must  give  you  something  in  ex- 
change for  it. 

Development  of  the  idea  of  property.  The  historical  develop- 
ment of  the  custom  of  recognizing  property  in  this  sense  has 
been  variously  described.  In  a  very  illuminating  article,  en- 
titled "  Rudimentary  Society  among  Boys,"1  Mr.  John  Johnson 
has  described  the  life  of  the  boys  on  McDonogh  Farm  in  Mary- 
land. This  farm,  the  model  for  many  subsequent  experiments 
in  pedagogics,  was  a  combined  home  and  school  for  boys  in 
which,  out  of  school  and  work  hours,  they  were  allowed  to  roam 
at  will  and  do  very  much  as  they  pleased.  The  author  of  the 
account,  who  had  himself  been  one  of  the  boys,  traces  an  inter- 
esting parallel  between  the  development  of  laws  and  customs 
among  those  boys  and  among  our  primitive  ancestors. 

A  Boy  Society.  Over  these  teeming  eight  hundred  acres  the 
"  McDonogh  boys"  roam  at  will,  each  according  to  his  ability  striving 
to  become  a  mighty  hunter  in  the  earth.  During  the  first  spring 
after  the  opening  of  the  school  the  boys  found  the  woods  abounding 
with  birds'  eggs  and  squirrels,  which  they  might  have  for  the  trouble 
of  taking.  During  the  autumn  they  gathered  chestnuts  and  walnuts 

1  Johns  Hopkins  University  Studies  in  Historical  and  Political  Science, 
Second  Series,  No.  XI.  Baltimore,  1884. 


108  PRINCIPLES  OF  NATIONAL  ECONOMY 

and  stored  them  away  to  be  cracked  and  eaten  before  the  big  fire  in 
the  schoolroom.  Whether  in  spring  or  in  autumn,  all  who  went  to 
the  labor  of  searching  were  rewarded  with  an  abundance.  When  the 
frost  had  killed  the  green  shoots  and  troubled  the  rabbits  to  get  a 
living,  every  boy  that  chose  to  do  so  set  traps  in  the  swamps  and 
ditches  and  baited  them  with  sweet-smelling  apples  or  more  pungent 
and  effective  onions. 

The  ground  was  then  regarded  as  the  property  of  the  community, 
and  while,  like  the  ancient  Teutonic  villager,  each  "McDonogh  boy" 
took  pains  to  exclude  strangers  from  the  Mark,  each  regarded  himself 
with  the  rest  as  a  joint  owner  of  the  harvest  of  nuts,  and  all  had 
equal  rights  of  hunting  and  trapping  in  the  waste.  As  in  the 
precursors  of  those  Aryan  villages  of  the  East,  recently  studied  by 
Phear,  "land  was  not  conceived  of  as  property  in  the  modern  sense, 
or  as  belonging  to  any  individual."  The  whole  was  common  to  them 
all,  and  every  boy  had  a  right  to  a  portion  of  the  fruits  of  the  ground. 


The  rabbit-trapping  season  begins  about  the  middle  of  October 
and  ends  early  in  December.  Its  opening  depends  upon  the 
weather  and  not,  like  the  walnut  harvest,  upon  the  legislation  of 
the  boys.  If  there  is  an  early  autumn  the  rabbits  may  be  induced 
by  the  scarcity  of  food  to  enter  the  traps  sooner  than  if  the  warm 
weather  continues  till  late. 

In  the  first  autumn  after  the  opening  of  the  school  each  boy  that 
chose  to  do  so  made  a  box  of  planks,  fitted  one  end  with  a  door  that 
would  fall  at  the  touch  of  a  trigger,  and,  having  found  a  promising 
spot,  there  set  his  trap.  The  hungry  rabbits  were  tempted  with 
fragrant  apples  and  appetizing  onions,  and  a  few  victims  were  enticed 
within  the  fatal  door.  At  that  time  no  boy  set  more  than  half  a 
dozen  traps,  and  almost  the  whole  school  enjoyed  the  delightful 
anticipation  of  having  rabbit  for  breakfast  on  some  future  morning. 

But  the  spots  where  rabbits  can  be  caught  on  eight  hundred  acres 
are  comparatively  few,  and  hence  the  closeness  of  the  traps  inter- 
fered with  the  amount  of  the  catch.  It  is  a  habit  with  rabbits  to 
move  about  in  well-marked  paths,  and  the  boys  usually  set  their 
traps  in  these  places.  Generally  a  rabbit  will  enter  the  first  trap  in 
his  path,  and  boys  often  complained  that  their  traps  were  rendered 


ECONOMIC  INSTITUTIONS  109 

useless  by  the  proximity  of  others.  After  a  year  or  two  of  this 
unsatisfactory  state  of  affairs  a  large  boy,  who  had  set  his  traps 
rather  earlier  than  the  rest,  began  dropping  heavy  stones  upon  all 
traps  set  closer  to  his  own  than  he  thought  desirable.  In  such  a 
society  as  we  are  studying,  a  hard-fisted  fellow  of  fifteen  is  a  great 
personage  and  has  much  the  same  influence  as  a  great  warrior  in 
a  primitive  village.  The  example  of  this  boy-magnate  was  imitated 
by  all  who  dared ;  and  by  common  consent,  or  perhaps  by  common 
submission,  a  limited  distance  between  traps  was  agreed  on.  Within 
a  circle  about  forty  yards  in  diameter,  drawn  about  a  trap  already 
set  as  a  center,  no  other  trap  was  to  be  placed.  For  the  season 
the  owner  of  the  trap  first  placed  on  any  given  piece  of  ground 
either  assumed  or  was  intrusted  with  authority  to  break  any  trap 
placed  within  the  specified  distance  of  his  own. 

Scarcity  of  land.  It  will  be  noted  that  the  scarcity  of  land 
suitable  for  trapping  rabbits  created  an  antagonism  of  interests 
among  the  members  of  that  community.  It  was  this  which  led 
to  the  effort  on  the  part  of  certain  fortunate  individuals  to  pro- 
tect their  own  interests  by  excluding  others  from  their  "land." 
The  principles  involved  here  are  similar  to  those  in  a  mining 
region  where  there  are  only  a  few  desirable  locations  and  many 
miners.  In  most  mining  camps,  however,  priority  of  possession 
was  the  basis  of  ownership.  The  staking  out  of  a  claim  accord- 
ing to  regular  rules  was  accepted  as  the  evidence  of  priority  of 
possession. 

Much  the  same  principle  was  involved  in  the  disputes  over 
cattle  ranges  in  the  West.  When  there  was  pasture  enough  for 
everybody  there  was  no  trouble  and  no  desire  for  ownership  or 
control  of  range  land;  but  when  pasturage  began  to  grow 
scarce  it  became  necessary  to  bring  the  ranges  under  some  kind 
of  control,  otherwise  they  would  become  overstocked  and  every- 
body would  lose.  To  men  with  practical  minds  rather  than 
vague  ideals  it  has  always  seemed  better  that  a  few  should  gain 
some  advantage  from  the  soil  of  a  given  locality  than  that  all 
should  fail  through  the  exhaustion  of  its  resources.  Accordingly 


HO  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  exclusive  use  of  certain  ranges  is  given  over  to  certain 
cattlemen,  and  others  must  move  on  to  new  ranges. 

The  Case  of  Abram  and  Lot.  Abram  showed  such  a  practical 
mind  as  this  in  his  famous  compromise  with  Lot  on  the  sub- 
ject of  pasturage : 

And  Abram  was  very  rich  in  cattle,  in  silver,  and  in  gold. 

And  he  went  on  his  journeys  from  the  south  even  to  Bethel,  unto 
the  place  where  his  tent  had  been  at  the  beginning,  between  Bethel 
and  Hai ;  .  .  . 

And  Lot  also,  which  went  with  Abram,  had  flocks,  and  herds, 
and  tents. 

And  the  land  was  not  able  to  bear  them,  that  they  might  dwell 
together :  for  their  substance  was  great,  so  that  they  could  not 
dwell  together. 

And  there  was  a  strife  between  the  herdmen  of  Abram's  cattle  and 
the  herdmen  of  Lot's  cattle:  and  the  Canaanite  and  the  Perizzite 
dwelt  then  in  the  land. 

And  Abram  said  unto  Lot,  "Let  there  be  no  strife,  I  pray  thee, 
between  thee  and  me,  and  between  my  herdmen  and  thy  herdmen; 
for  we  be  brethren. 

Is  not  the  whole  land  before  thee?  Separate  thyself,  I  pray  thee, 
from  me :  if  thou  v/ilt  take  the  left  hand,  then  I  will  go  to  the 
right ;  or  if  thou  depart  to  the  right  hand,  then  I  will  go  to  the  left." 

And  Lot  lifted  up  his  eyes,  and  beheld  all  the  plain  of  Jordan,  that 
it  was  well  watered  every  where,  before  the  Lord  destroyed  Sodom 
and  Gomorrah,  even  as  the  garden  of  the  Lord,  like  the  land  of 
Egypt,  as  thou  comest  unto  Zoar. 

Then  Lot  chose  him  all  the  plain  of  Jordan ;  and  Lot  journeyed 
east ;  and  they  separated  themselves  the  one  from  the  other. 

Abram  dwelt  in  the  land  of  Canaan,  and  Lot  dwelt  in  the  cities 
of  the  plain,  and  pitched  his  tent  toward  Sodom. 

It  is  always  possible  to  "trek."  There  was  one  important 
difference  between  the  situation  of  the  herdsmen  in  a  cattle 
country,  or  the  miners  in  a  mining  camp,  and  that  of  the  boys 
on  the  McDonogh  farm.  When  the  good  locations  in  the  range 
country  and  the  mining  camp  are  all  occupied,  other  would-be 


ECONOMIC  INSTITUTIONS  in 

ranchers  or  miners  need  not  come  to  these  spots,  or,  if  they 
happen  to  be  there,  they  can  move  on  to  other  opportunities  in 
other  places.  The  boys  could  not  leave  the  school,  and  when 
all  the  good  locations  for  rabbit  traps  were  occupied  the  other 
boys  had  to  go  without  rabbit  or  else  pay  rent  to  the  fortunate 
possessors  of  the  rabbit  land.  It  was  no  great  hardship  for 
Abram  and  Lot  to  separate,  each  going  where  there  was  pas- 
turage, though  each  might,  if  he  had  been  narrowly  stubborn, 
have  refused  to  budge  an  inch.  On  the  whole,  it  is  better  that 
people  should  separate  and  observe  boundary  lines  than  that 
they  should  all  strive  tenaciously  for  the  best  locations  and  all 
suffer  alike  through  the  overcrowding. 

Boundaries.  This  observance  of  boundary  lines  is  the  first 
element  in  the  institution  of  property  in  land.  Some  rule  of 
this  kind  is  an  absolute  physical  necessity.  In  some  cases  the 
boundary  is  tribal  or  national,  in  other  cases  it  is  the  boundary 
of  the  lands  of  the  village,  the  town,  or  the  clan,  and  in  still 
others  it  is  the  boundary  of  the  lands  of  the  family  as  we  now 
know  it.  In  all  cases,  whether  the  lands  of  the  tribe  or  village 
be  held  in  common  or  in  severalty,  they  must  be  protected 
against  outsiders ;  otherwise  the  tribe  or  the  village  is  in  danger 
of  starvation.  The  modern  conception  of  property  in  land  is 
property  in  severalty,  which  is  commonly  called  individual 
property.  Since,  however,  the  head  of  a  family  cannot,  gen- 
erally, sell  the  land  without  the  consent  of  other  members  of 
his  family  or  their  guardians,  it  seems  that  property  in  land 
is  more  of  a  family  than  of  an  individual  affair. 

Priority  of  possession.  The  practical  situation  out  of  which 
the  institution  of  property  in  land  grows  may  be  described  as 
priority  of  occupancy.  Whether  it  be  the  nation,  the  tribe,  or 
the  individual  which  owns  the  land,  it  usually  bases  its  claim 
against  all  comers  upon  priority  of  occupancy.  Conquest  is 
sometimes  resorted  to  to  destroy  this  claim.  The  world  has 
never  regarded  this  as  just,  but  it  has  not  always  been  able  to 
prevent  it.  Having  once  conquered  a  territory,  however,  the 


H2  PRINCIPLES  OF  NATIONAL  ECONOMY 

conquering  tribe  or  nation  can  use  its  claim  of  priority  against 
rival  claimants  in  the  future.  Thus,  we,  in  the  United  States, 
should  certainly  feel  that  we  had  a  grievance  if  some  upstart 
nation  were  to  try  to  dispossess  us  as  we  long  ago  dispossessed 
the  Indians. 

However,  we  do  not  now  own  the  land  as  a  nation  (except 
the  public  domain)  but  as  families.  The  government  recog- 
nizes the  right  of  priority  in  awarding  land  to  individuals. 
Under  the  system  of  voluntary  agreement  we  have  the  right  of 
free  contract,  of  bargain  and  sale.  Under  this  system  the  right 
based  upon  priority  of  possession  may  be  transferred  from  one 
family  to  another  a  great  many  times.  The  subsequent  owners 
base  their  claim  upon  the  right  of  purchase,  but  it  goes  back  to 
the  fact  of  priority  on  the  part  of  the  first  owner.  If  one  will 
undertake  to  trace  the  title  to  a  piece  of  land,  he  will  discover 
how  important  a  factor  priority  is. 

The  unattached  versus  the  attached.  In  these  matters  we  face 
the  same  practical  necessity  as  the  lower  animals.  Even  cer- 
tain shellfish,  like  the  oysters,  may  serve  as  an  illustration.  The 
young  of  these  shellfish  pass  through  a  free-swimming  stage 
before  they  become  attached  to  the  bottom  of  the  ocean.  When 
one  has  become  attached,  his  priority  must,  of  physical  neces- 
sity, be  respected  by  young  free-swimmers  who  are  looking  for 
a  place  to  attach  themselves.  Presumably  they  have  the  power 
of  swimming  in  order  that  they  may  "move  on"  and  find  new 
places  to  which  to  attach  themselves.  They  may,  in  a  sense,  be 
said  to  pass  through  a  stage  similar  to  the  pilgrim  stage  of  our 
Eastern  settlements  and  the  prairie-schooner  stage  of  our  West- 
ern settlements.  In  all  these  cases  it  is  the  most  vigorous,  self- 
reliant,  and  courageous  individuals  who  do  the  pioneering  in 
new  areas. 

Tribal  or  national  property  differs  in  one  important  respect 
from  individual  or  family  property.  In  the  former  case  the 
tribe  or  nation  must  defend  its  own  property,  there  being  no 
higher  power  to  which  it  can  appeal  for  protection  against  an 


ECONOMIC  INSTITUTIONS 

outside  invader.  In  the  latter  case  the  individual  or  the  family 
does  not  have  to  defend  its  own  possession,  but  may  call  upon 
the  state  for  defense.  So  important  has  this  become  that  we 
are  in  the  habit  of  speaking  of  property  almost  as  though  it  con- 
sisted exclusively  in  this  protection  afforded  by  the  state.  Thus 
the  individual  may  possess  an  object,  but  he  is  not  said  to  have 
property  in  it  unless  the  state  recognizes  his  right  to  possess  it 
and  warns  others  not  to  meddle  with  it,  undertaking  to  punish 
anyone  who  does.  Moreover,  the  individual's  property  rights 
in  a  thing  extend  only  so  far  as  the  state  recognizes  and  warns 
others  not  to  meddle.  In  some  cases,  for  example,  an  owner  of 
land  is  not  permitted  to  exclude  other  persons  from  walking 
across  it,  in  which  cases  those  other  persons  are  said  to  have 
right  of  way.  There  are  numerous  other  limitations  upon  the 
property  rights. 

Human  rights  and  property  rights.  Certain  confused  minds 
have  attempted  to  make  a  distinction  between  human  rights 
and  property  rights.  The  fact  is,  however,  that  all  prop- 
erty rights  are  human  rights.  Strictly  speaking,  property  has 
no  rights  and  could  not  possibly  have  any.  Human  beings 
have  rights  in  property.  Property  owners  have  rights  in  the 
things  which  they  own. 

While  the  original  fact  on  which  property  in  land  and  other 
natural  objects  is  justified  by  the  state  is  priority  of  possession, 
the  basis  of  property  in  the  products  of  industry  is  that  of 
production,  or,  if  it  is  not  too  strong  a  word,  of  creation.  The 
boy  who  first  finds  and  takes  possession  of  a  natural  object 
of  desire  and  the  boy  who  makes  or  contrives  another  object  of 
desire  both  feel  pretty  strongly  that  the  objects  belong  to  them. 
Both,  however,  recognize  the  right  to  transfer.  Men  feel  very 
much  the  same  way.  The  fact  that  one  has  made  a  thing  is 
generally  recognized  as  giving  him  a  right  to  it.  It  is  also  recog- 
nized that  he  may  transfer  that  right  undiminished  to  another 
person,  in  which  case  the  other  person  acquires  all  the  rights 
possessed  by  the  maker. 


PRINCIPLES  OF  NATIONAL  ECONOMY 

Kinds  of  property.  Property  may  be  classified,  on  the  basis 
of  the  original  method  of  acquiring  it,  into  the  three  following 
groups : 

f  Things  which  one  has  produced 

Earnings-!  Things  received  in  exchange  for  what  one  has  pro- 
duced 
f  Natural  objects  found  and  appropriated 


PROPERTY, 


Findings 


Things  whose  value  has  greatly  increased  while  in 


1       one's   possession 
[  Things  received  by  gift  or  inheritance 

{Things  acquired  by  the  destructive  and  deceptive 
methods  named  in  the  outline  in  Chapter  IV, 
page  60 


The  question  of  the  moral  right  or  the  social  expediency  of 
private  property,  even  in  things  which  one  has  produced,  has 
been  discussed  from  very  ancient  times.  In  Plato's  "Republic" 
it  is  argued  that  questions  of  mine  and  thine  tend  to  divide 
rather  than  to  unite  the  state.  From  that  day  down  to  the 
present  there  probably  has  never  been  a  generation  in  which  at 
least  a  small  minority  has  not  opposed  private  ownership. 

Public  or  common  property  as  compared  with  private  or 
family  property.  So  far  as  the  pure  morals  of  the  argument 
are  concerned  there  is  as  much  to  be  said  against  public  as 
against  private  ownership,  unless  the  public  is  defined  so  as  to 
include  all  mankind  rather  than  a  single  tribe  or  nation.  If  it  is 
held  to  be  wrong  for  an  individual  to  call  anything  his  own  to 
the  exclusion  of  his  brother  men,  on  the  ground  that  such 
conduct  on  his  part  would  place  a  barrier  between  himself 
and  his  brethren  and  thus  be  contrary  to  the  principles  of  the 
brotherhood  of  man,  it  is  equally  wrong,  and  for  the  same 
reason,  for  any  tribe  or  nation  to  call  anything  its  own  to  the 
exclusion  of  other  tribes  or  nations.  That  is  quite  as  much 
opposed  to  the  principle  of  universal  brotherhood  as  is  private 
ownership. 


III.    THE  FAMILY 

The  recognition  of  property,  which  follows  automatically 
wherever  the  possessor  of  a  thing  is  protected  against  dis- 
possession through  violence  or  fraud,  tends  to  give  the  individ- 
ual a  chance  to  safeguard  the  interests  of  those  for  whom  he 
cares  most.  If  he  had  little  or  no  family  feeling,  but  strong 
tribal  feeling  instead,  he  would  care  more  for  the  safeguarding 
of  the  tribe  than  for  the  safeguarding  of  his  own  family.  In 
that  case,  tribal  or  communal  property  would  be  the  logical 
thing.  Each  one  would  then  have  an  opportunity  to  work  in  the 
interest  of  those  for  whom  he  cared  most;  that  is,  all  his 
fellow  tribesmen.  In  voluntarily  disposing  of  his  possessions 
he  would  naturally  turn  them  over  to  the  whole  tribe.  But 
when  one  cares  more  for  one's  flesh  and  blood  than  for  other 
members  of  the  tribe  or  nation,  one  is  likely  to  work  in  the 
interest  of  the  former.  Private  or  family  property  is  here  the 
logical  thing,  because  it  gives  to  prudent  persons  the  power  to 
safeguard  the  interests  of  those  in  whom  they  have  a  powerful 
interest.  Such  persons  have  the  strongest  possible  motives  for 
accumulating  property,  and  it  is  very  much  to  the  interest  of 
the  nation  that  everyone  should  accumulate  property.  That  is 
one  way  by  which  the  prosperity  of  the  nation  is  promoted. 

Some  form  of  property  inevitable.  Whether  we  approve  of 
private  property  or  not,  on  grounds  either  of  sentimental 
morality  or  of  social  expediency,  we  must  make  up  our  minds 
that  it  will  continue  to  exist.  The  instinct  of  possession  is  so 
strong  that  no  government  could  withstand  it.  One  class 
may  array  itself  against  another,  the  propertyless  class  may 
outvote  the  propertied  class,  honestly  supposing  that  it  is 
doing  so  on  grounds  of  broad  humanitarianism ;  but  experience 
has  shown  that  the  new  class,  when  it  comes  into  power,  shows 
the  same  instincts  and  tendencies  as  were  shown  by  the  class 
which  was  in  power  before  it.  On  these  instincts  and  tenden- 
cies, rather  than  on  philosophical  theories,  are  governments 
and  institutions  built.  Moreover,  they  must  be  built  on  such 


n6  PRINCIPLES  OF  NATIONAL  ECONOMY 

foundations  in  order  to  be  durable.  Theories  are  easily  changed 
and  do,  as  a  matter  of  fact,  change  frequently.  Institutions 
built  on  theories  must,  therefore,  be  unstable.  But  instincts 
are  hard  to  change  and,  as  a  matter  of  fact,  change  very  slowly. 
Institutions  based  on  these  instincts  may,  therefore,  be  durable. 

Property  rights  always  limited.  It  must  be  observed,  how- 
ever, that  such  a  thing  as  an  absolute  and  unqualified  right  of 
property  has  never  existed  and  does  not  now  exist.  No  govern- 
ment undertakes  to  protect  any  individual  in  the  unqualified 
use  or  abuse  of  anything  which  he  calls  his  own.  It  may  not 
permit  another  individual  to  dispossess  him,  or  seriously  to  in- 
terfere with  his  use,  but  it  will  itself  exercise  that  power  when- 
ever it  deems  it  expedient  to  do  so.  The  whole  question  of 
property  is  like  every  other  question — it  is  subordinate  to  the 
public  good.  In  so  far  as  the  private  use  or  control  of  anything 
is  thought  to  be  advantageous  to  the  general  public  in  the  long 
run,  so  far  will  a  wise  government  protect  the  individual  against 
outside  interference  with  that  use.  This  is  as  far  as  private 
property  extends.  Whenever  or  wherever  the  private  individ- 
ual's use  or  control  of  a  thing  is  thought  to  be  contrary  to  the 
public  interest,  there  the  wise  government's  protection  will  end. 
It  is  generally  thought  by  the  best  students  to  be  to  the  public 
interest  that  individuals  shall  be  free  to  use  their  physical 
possessions,  as  they  use  their  personal  qualities,  for  productive 
rather  than  for  destructive  purposes.  No  wise  government  per- 
mits a  person  to  use  even  his  own  muscular  or  mental  strength 
without  limit  or  qualification ;  but  there  appear  to  be  as  good 
reasons  why  he  should  be  free  to  use  and  control  his  physical 
possessions  as  to  use  and  control  his  personal  powers,  so  long 
as  he  uses  them  productively.  It  appears,  for  example,  as  ex- 
pedient that  the  farmer  should  be  permitted  to  use  his  tools 
and  implements  for  productive  purposes  as  that  he  should  be 
free  to  use  his  muscles  or  his  brain. 

Personal  powers  and  physical  possessions.  There  are,  to  be 
sure,  important  differences  between  one's  personal  powers  and 


ECONOMIC  INSTITUTIONS  117 

one's  material  possessions;  but  these  differences,  however  im- 
portant they  may  be  from  other  points  of  view,  seem  to  have  no 
importance  from  the  point  of  view  of  productivity  and  useful- 
ness on  the  one  hand  or  of  destructiveness  on  the  other. 

It  was  indicated  above  that  what  is  sometimes  called  private 
property  appears  in  certain  cases  to  be  family  property  rather 
than  individual  property.  In  fact,  there  is  a  much  closer  con- 
nection between  that  institution  called  the  family  and  that 
institution  called  property  than  is  ordinarily  understood  or 
appreciated.  If  we  assume  that  the  average  individual  has  a 
deeper  interest  in  his  own  flesh  and  blood  than  he  has  in  other 
people,  and  if  we  admit  that,  on  the  whole,  it  is  desirable  that 
he  should  have  this  deeper  interest,  it  is  not  illogical  to  permit 
him  to  make  provisions  for  their  special  care  and  maintenance ; 
otherwise  we  should  compel  him  to  work  equally  in  the  inter- 
ests of  all  members  of  the  community,  even  though  he  does  not 
care  equally  for  all  of  them.  Again,  if  in  his  efforts  to  provide 
for  them  he  conceives  it  to  be  wise  to  spend  a  part  of  his  income 
for  durable  goods  rather  than  for  goods  for  immediate  con- 
sumption, it  will  be  difficult  to  state  a  satisfactory  reason  why 
he  should  not  be  permitted  to  do  so.  If  we  permit  him  to  pur- 
chase these  durable  goods,  and  if  we  insist  that  he  shall  not  be 
dispossessed  without  his  consent, — in  other  words,  if  we  con- 
tinue to  protect  him  in  the  possession  of  these  durable  goods,— 
we  have  the  institution  of  property.  If  he  did  not  care  any 
more  for  his  own  flesh  and  blood  than  for  all  the  other  members 
of  the  community,  there  is  no  likelihood  that  he  would  care  to 
own  anything  which  might  just  as  well  be  devoted  to  the  use 
of  all  those  for  whom  he  cares.  He  would  work  just  as  hard 
in  the  interest  of  all  members  of  the  community  or  to  accumu- 
late material  goods  for  their  benefit  as  he  will  now  work  for 
the  smaller  family  group  or  to  accumulate  goods  for  their 
satisfaction. 


rig  PRINCIPLES  OF  NATIONAL  ECONOMY 

IV.  INHERITANCE 

But  the  care  for  one's  own  flesh  and  blood  extends  beyond 
the  period  of  one's  own  life.  One  of  the  strongest  motives  for 
industry  and  thrift  is  the  desire  to  provide  for  the  ne%ds  or  de- 
sires of  one's  offspring  after  one  has  ceased  to  live.  This  gives 
rise  to  the  system  of  inheritances  or  of  inherited  property. 
When  the  state  recognizes  the  desire  to  provide  for  one's  off- 
spring as  a  legitimate  motive  and  undertakes  to  protect  the  in- 
heritors of  property  in  the  same  way  that  it  protects  anyone  else 
who  has  come  into  the  possession  of  a  thing  legitimately  (that 
is,  without  force  or  fraud),  then  there  will  be  inherited  wealth, 
and  the  inheritor  inherits  all  the  rights  of  property  which  had 
belonged  to  the  accumulator. 

Inheritance  and  voluntary  agreement.  This  is  in  harmony 
with  the  principle  of  voluntary  agreement.  Any  piece  of  prop- 
erty which  you  can  get  from  anybody  else  with  his  full  and  free 
consent  and  that  of  all  the  others  who  have  any  claim  upon  it, 
is  yours  as  truly  when  you  inherit  it  as  when  you  buy  it.  Buy- 
ing it  is  only  one  way  of  acquiring  it  with  the  full  and  free  con- 
sent of  the  previous  possessor ;  inheriting  is  another. 

Inheritance  and  inequality.  Under  this  system  of  inheritance, 
however,  a  situation  will  soon  arise  wherein  a  considerable  num- 
ber of  persons  will  find  themselves  in  the  possession  of  property 
which  they  themselves  never  produced,  earned,  or  purchased 
out  of  their  earnings,  whereas  there  will  be  others  who  can 
never  come  into  possession  of  any  property  except  by  produc- 
ing it,  earning  it,  or  purchasing  it  out  of  their  earnings.  This 
will  doubtless  begin  to  look  unfair,  and  the  unfortunate  in- 
dividuals who  inherit  nothing  from  their  ancestors  may  begin 
to  envy  those  more  fortunate  persons  whose  ancestors  provided 
for  them.  A  real  conflict  of  interests  is  likely  to  grow  out  of 
this  situation,  giving  rise  to  a  serious  problem  in  social  justice. 

Two  methods  of  approach.1  There  are  two  points  of  view  from 
which  to  approach  the  problem  of  inherited  wealth.  These  methods 

1  From  the  author's  "  Essays  in  Social  Justice."    Harvard  University  Press,  1915. 


ECONOMIC  INSTITUTIONS  119 

of  approach  lead  to  such  contradictory  conclusions  that  it  seems 
necessary  to  follow  each  in  turn  to  its  logical  result  and  then  see 
what  can  be  done  toward  harmonizing  them. 

The  point  of  view  of  the  present  generation.  From  the  point  of 
view  of  the  present  generation,  or  the  generation  which  has  accu- 
mulated the  wealth  in  question,  the  following  considerations  will  ap- 
peal to  most  men  as  reasonable.  Assuming,  to  begin  with,  that  a 
man  has  earned  his  income,  there  is  no  good  reason  why  he  should 
be  compelled  to  consume  it  all  and  save  none  of  it.  In  fact,  it  can 
easily  be  shown  that  it  is  very  much  better  for  society  that  he  should 
save  a  part  of  it, — all  of  it,  in  fact,  beyond  what  it  is  necessary  that 
he  should  consume  in  order  to  maintain  his  working  efficiency  at  its 
maximum.  If  he  saves  a  part  of  his  income,  it  is  better  that  he 
should  invest  it  in  productive  or  useful  tools  rather  than  that  he 
should  hide  it  away.  If  he  saves  a  part  of  his  income  and  invests  it 
v/isely  in  useful  or  productive  tools,  there  is  no  harm  in  allowing  him 
some  control  over  them ;  in  other  words,  there  is  no  harm  in  regard- 
ing them  as  his  property.  If  they  are  his  property,  there  is  no  harm 
in  allowing  him  some  freedom  in  disposing  of  them.  If  he  chooses  to 
give  them  away,  it  would  seem  inexpedient  and  unjust  to  forbid  him 
to  do  so.  And  if  he  is  to  be  permitted  thus  to  dispose  of  them,  there 
could  be  no  harm  in  permitting  him  to  give  them  to  his  children  or 
near  relatives  rather  than  to  strangers. 

Some  fortunes  are  earned.  All  this  is,  of  course,  based  on  the 
assumption  with  which  we  started ;  namely,  that  he  has  actually 
earned  his  income.  If  he  has  not  earned  it,  the  obvious  thing  to  do 
is  to  correct  the  evil  at  the  source  by  cutting  off  his  unearned  income. 
It  would  be  exceedingly  unintelligent  to  permit  him  to  receive  an 
unearned  income,  and  thus  build  up  a  swollen  fortune,  and  then  try 
to  correct  the  evil  after  he  is  dead  by  depriving  his  heirs  of  their  in- 
heritance. This  unintelligence  would  amount  to  a  crime  if  fortunes 
actually  earned  were  swept  away  by  the  abolition  of  inheritances 
merely  because  some  other  fortunes  were  unearned.  This  would  be 
worse  than  punishing  the  just  with  the  unjust  for  sins  which  the 
unjust  had  committed  ;  it  would  be  punishing  the  heirs  of  the  just 
and  of  the  unjust  for  sins  which  the  unjust  had  committed. 

Looking  at  the  question  of  inheritance  apart  from  the  question  of 
the  source  of  income,  and  looking  at  it  also  from  the  point  of  view 
of  the  generation  which  accumulates  the  wealth,  there  seems  no  good 


120  PRINCIPLES  OF  NATIONAL  ECONOMY 

reason  why  the  individual  who  saves  a  part  of  his  income  and  accu- 
mulates a  fund  of  wealth  should  not  be  permitted  to  transmit  it  to 
his  widow  and  orphans.  How  wide  the  circle  of  relatives  should  be 
who  should  be  allowed  a  legal  claim  on  the  inheritance  is  another 
question.  Undoubtedly  it  should  be  much  narrower  than  is  at  pres- 
ent permitted.  Since  one  of  the  strongest  motives  to  accumulation  is 
the  desire  to  provide  for  the  members  of  one's  own  family,  and  since 
accumulation  is  socially  desirable,  there  is  a  positive  reason  why  the 
right  of  transmission  by  inheritance  should  be  sustained.  One  effect 
of  the  destruction  of  this  right  would  be  to  encourage  lavish  con- 
sumption and  discourage  accumulation.  Each  man  who  loves  to 
gratify  himself  would  be  tempted,  somewhat  more  strongly  than  he 
is  at  present,  to  say,  as  soon  as  he  had  accumulated  a  competence, 
"Soul,  thou  hast  much  goods  laid  up  for  many  years;  take  thine 
ease,  eat,  drink,  and  be  merry."  If  he  could  not  leave  anything  to 
his  family,  they  would  be  just  as  well  off  if  he  were  to  consume  his 
fortune  as  if  he  were  to  save  it.  Under  such  conditions,  unless  the 
law  were  evaded  by  gifts  during  the  lifetime  of  the  accumulator, 
capital,  which  is  tools,  would  tend  to  grow  scarce  or  increase  less 
rapidly,  industries  to  contract  or  to  expand  less  rapidly,  the  effective 
demand  for  labor  to  decline  and  wages  to  fall,  while  interest  would 
rise  in  response  to  the  scarcity  of  capital. 

The  point  of  view  oj  succeeding  generations.  Thus  far  we  have 
considered  the  problem  exclusively  from  the  standpoint  of  the  genera- 
tion which  accumulates  wealth,  forgetting  succeeding  generations.  If, 
now,  we  consider  the  matter  exclusively  from  the  standpoint  of  suc- 
ceeding generations,  forgetting  the  generation  which  accumulated  the 
wealth  in  question,  the  whole  situation  has  a  different  look.  From  this 
new  point  of  view  we  shall  notice,  first,  that  certain  individuals — the 
inheritors  of  wealth— start  in  the  race  of  life  with  a  sum  of  capital 
in  addition  to  their  natural  powers,  while  others  start  with  nothing 
but  their  natural  powers.  It  is  obvious  that  the  inheritors  have  an 
advantage  in  the  race,  and  therefore  it  is  also  obvious  that  it  is  not 
a  fair  race. 

What  is  fair  competition  ?  It  is  perhaps  ^desirable  at  this  point  to 
consider  the  meaning  of  the  word  "fair"  as  applied  to  any  form  of 
competition.  In  a  foot  race,  for  example,  the  competition  is  some- 
times said  to  be  fair  when  all  the  runners  are  given  an  even  start 
and  given  an  equally  good  track  on  which  to  run.  Of  course  there 


ECONOMIC  INSTITUTIONS  121 

will  be  great  differences  in  the  speed  of  the  different  runners,  and  it  is 
certain  that  there  will  be  great  unevenness  among  the  runners  at 
the  end  of  the  race,  even  though  they  were  all  even  at  the  start  and  all 
had  equally  good  outward  conditions.  Inequality  of  results,  when 
it  can  be  attributed  exclusively  to  inequality  of  power  and  not  to  an 
uneven  start  or  any  outward  advantages  or  disadvantages,  may,  from 
this  point  of  view,  be  considered  fair. 

Equal  results.  In  other  cases  there  is  a  deliberate  attempt  to  pre- 
dict the  relative  speed  of  the  various  runners  and  to  arrange  a  series 
of  handicaps  in  order  that  the  race  may  be  as  nearly  even  at  the  end 
as  possible.  In  this  case  they  are  deliberately  given  an  uneven  start 
in  order  that  there  may  be  an  even  finish,  or  a  finish  as  nearly  even 
as  the  handicap  committee  can  arrange.  If  the  handicaps  are  in- 
telligently and  fairly  calculated,  this  kind  of  race  also  is  said  to 
be  fair. 

An  even  start.  The  same  principles  would  apply  to  economic  com- 
petition. If  all  the  competitors  were  given  an  even  start  and  if  all 
were  given  a  fair  field  with  no  favors,  it  would  be  called,  from  one 
point  of  view,  fair  competition.  On  the  other  hand,  if  it  were  possible 
to  arrange  a  series  of  handicaps,  giving  each  of  the  weaker  com- 
petitors an  advantage  commensurate  with  his  weakness,  such  a  com- 
petition might  also  be  said  to  be  fair.  The  competitors  would  be 
given  an  uneven  start  and  uneven  advantage  in  order  that  they  might 
be  as  nearly  even  as  possible  at  the  end  of  the  race. 

Handicaps.  But  it  must  be  remembered  that  a  system  of  handi- 
caps must  be  intelligently  arranged,  otherwise  it  becomes  outra- 
geously unfair.  If  instead  of  giving  some  outward  advantage  to  the 
slower  runner  it  were  given  to  the  swifter  runner,  and  the  prizes 
awarded  pn  the  basis  of  the  results  of  such  a  race,  every  sentiment  of 
fairness  would  be  outraged.  And  in  the  field  of  economic  competi- 
tion, if  the  handicaps  were  arranged  in  inverse  order  to  the  power  of 
the  competitors,  everyone  would  say  that  it  was  unfair.  Again,  if  the 
handicaps  were  arranged  in  a  haphazard  fashion,  without  any  regard 
to  the  power  of  the  competitors,  so  that  the  stronger  were  as  likely 
as  the  weaker  to  be  given  an  outward  advantage,  the  case  would  be 
only  a  little  better.  No  one  would  even  pretend  that  it  was  a  fair 
competition.  This  is  exactly  what  happens  to  economic  competition 
under  the  system  of  inherited  wealth.  From  this  point  of  view,  for- 
getting the  other,  there  can  scarcely  be  two  opinions  on  the  subject. 


122  PRINCIPLES  OF  NATIONAL  ECONOMY 

Inheritances  ought  not  to  be  allowed,  because  they  make  competition 
unfair.  The  strong  competitor  is  quite  as  likely  as  the  weak  to  be 
given  the  advantage  of  a  fund  of  capital  with  which  to  start  the 
race  of  life. 

Compromising  the  two  points  of  view.  These  two  points  of  view, 
from  which  such  opposite  conclusions  are  reached,  may  be  harmo- 
nized, or  compromised,  by  considering  the  family  rather  than  the 
individual  as  the  unit  of  society,  and  considering  the  family  as  a 
permanent  unit  unaffected  by  the  brevity  of  individual  lives.  We 
should  then  assume  that  economic  competition  takes  place  between 
families  rather  than  between  individuals.  And  the  family  being  a 
permanent  rather  than  a  transitory  unit,  the  race  or  the  competi- 
tion cannot  be  considered  as  having  a  beginning  or  an  end.  What  is 
called  the  inheritance  of  wealth  is,  therefore,  not  to  be  considered  as 
giving  an  individual  an  unearned  advantage  in  competition  so  much 
as  keeping  in  the  possession  of  the  family  the  advantage  which  it 
has  already  earned. 

In  proportion  as  one  is  in  the  habit  of  thinking  in  terms  of  the 
family  rather  than  of  the  individual  and  of  emphasizing  the  solidarity 
and  perpetuity  of  the  family  and  the  unity  of  its  interests,  in  that 
proportion  will  one  emphasize  the  first  point  of  view  and  minimize 
the  arguments  which  are  used  against  the  inheritance  of  wealth.  But 
in  proportion  as  one  is  in  the  habit  of  thinking  in  terms  of  the  individ- 
ual rather  than  the  family,  or  of  thinking  of  the  family  as  a  temporary 
biological  unit  (beginning  with  marriage  and  ending  with  death) 
existing  for  the  purpose  of  producing  children  and  bringing  them  to 
maturity,  in  that  proportion  will  one  naturally  emphasize  the  second 
point  of  view  and  minimize  the  arguments  in  support  of  the  in- 
heritance of  wealth.  Before  considering  the  merits  of  the  ^;wo  con- 
ceptions of  the  family  it  is  safe  to  record  the  fact  that  the  undoubted 
tendency  of  popular  opinion  is  away  from  the  conception  of  the 
family  as  a  solid  and  perpetual  social  unit  and  toward  that  of  the 
family  as  a  temporary,  biological  unit.  There  are  even  evidences  of 
a  tendency  toward  the  purely  individualistic  conception  which  elimi- 
nates the  family  as  an  institution,  though  recognizing  the  necessity 
of  a  mating  of  males  and  females  for  the  propagation  of  the  species. 


CHAPTER  VII 
THE  QUALITY  OF  THE  PEOPLE 

What  kind  of  people  are  we  ?  However  wisely  the  economic 
activities  of  the  people  may  be  controlled  by  government, 
morals,  and  religion,  and  however  sound  and  rational  their 
economic  institutions  may  be,  much  will  depend  upon  the  quality 
of  the  people  themselves.  In  fact,  all  these  agencies  in  a  demo- 
cratic country  will  themselves  be  determined  by  the  quality  of 
the  people.  A  wise  and  benevolent  despot  might  conceivably 
give  degraded  people  a  much  better  government  than  they 
would  ever  originate,  and  he  might  even  encourage  a  sounder 
system  of  morals  than  they  would  ever  practice  if  left  to  them- 
selves ;  but  democratic  people  have  no  one  to  depend  upon 
but  themselves,  and  if  they  are  of  poor  quality,  there  is  no 
hope  for  them,  because  their  system  of  control  and  their  eco- 
nomic institutions  are  likely  to  be  of  poor  quality. 

How  much  civilization  can  we  stand  ?  There  is  a  story  of  an 
aged  savage  who  had  lived  since  his  early  youth  under  civilized 
conditions,  but  who  in  his  old  age  returned  to  his  native  tribe, 
saying  that  he  had  tried  civilization  for  forty  years  and  it  was 
not  worth  the  trouble.  Much  of  the  philosophy  of  civiliza- 
tion is  contained,  or  at  least  implied,  in  his  remark.  Civiliza- 
tion consists  largely  in  taking  trouble.  Civilized  people  are 
a  great  deal  of  trouble  to  themselves;  and  civilization  will 
never  seem  worth  the  trouble  to  anyone  whose  mind  is  so  con- 
stituted as  to  be  incapable  of  taking  trouble  without  great 
fatigue  and  irksomeness.  It  is  more  trouble  to  plan  for  the 
future  than  to  live  on  the  impulse  of  the  moment;  it  is  more 
trouble  to  save  seed  corn  than  not  to  save  it ;  it  is  more  trouble 
to  invest  one's  income  in  productive  enterprise  than  to  consume 
it  all  as  one  goes  along, — in  short,  it  is  more  trouble  to  think, 
to  plan,  to  exercise  self-control,  to  direct  one's  conduct  with  a 

123 


124  PRINCIPLES  OF  NATIONAL  ECONOMY 

view  to  one's  needs  ten  or  twenty  years  hence  than  to  live 
wholly  in  the  present,  allowing  the  future  to  take  care  of  itself. 
Of  course  it  works  better  in  the  long  run  to  take  trouble  of  this 
kind.  People  who  are  willing  to  take  this  kind  of  trouble 
become  civilized ;  people  who  do  not,  remain  savages. 

To  one  kind  of  person,  with  low  mentality  and  little  moral 
self-control,  the  alternatives  present  themselves  of  taking  trou- 
ble every  day  with  a  view  to  his  interests  in  the  distant  future 
and  of  refraining  from  taking  trouble  and  facing  hardship  in 
the  distant  future.  Which  alternative  he  will  choose  will  depend 
on  the  kind  of  man  he  is.  If  the  hardships  of  the  future  seem 
less  burdensome  than  the  fatigue  of  taking  trouble  in  the 
present,  he  will  not  take  the  trouble  but  will  accept  the  hard- 
ships of  the  future.  Such  a  man  will  never  become  civilized, 
or  if  he  ever  does  become  civilized  he  will  ultimately  decide,  as 
did  our  aged  savage,  that  it  is  not  worth  the  trouble,  and  he 
will,  therefore,  relapse  into  savagery.  On  the  other  hand,  an 
individual  of  higher  mentality  and  moral  self-control,  when 
facing  the  same  alternatives,  will  choose  the  other  one.  Taking 
trouble  is  not  so  very  burdensome  to  such  a  person.  Thinking, 
planning,  subordinating  the  whim  of  the  moment  to  the  larger 
interest  of  the  future,  are  easy  to  such  a  man.  He  will  naturally, 
therefore,  choose  that  alternative  and  will,  almost  automati- 
cally, become  civilized.  In  the  long  run,  therefore,  the  fate 
of  our  civilization  will  be  determined  by  the  kind  of  people 
we  are,  which  will  determine  the  kind  of  choices  we  make  when 
facing  alternatives  of  the  kind  mentioned. 

Why  man  rules  over  the  rest  of  the  animal  creation.  In  at- 
tempting to  discuss  the  quality  of  the  people  we  are  not  nec- 
essarily entering  upon  a  discussion  of  the  whole  field  of 
physiology,  psychology,  and  morals.  There  are  certain  out- 
standing qualities  which  man  possesses  in  greater  degree  than 
the  brutes,  which  civilized  man  possesses  in  greater  degree  than 
the  savage,  and  which,  in  any  civilized  community,  the  more 
successful  classes  possess  in  greater  degree  than  the  less  suc- 
cessful. There  are  other  qualities,  such  as  the  sense  of  smell  and 


THE  QUALITY  OF  THE  PEOPLE  125 

the  ability  to  endure  pain,  which  certain  savages  seem  to  possess 
in  greater  degree  than  civilized  man.  If  these  were  the  impor- 
tant qualities,  civilized  man  could  scarcely  claim  superiority 
over  the  savage.  Some  savage  races  seem  even  to  possess  cer- 
tain moral  qualities  in  greater  degree  than  civilized  men.  Trav- 
elers have  frequently  praised  the  honesty  of  certain  tribes,  their 
fidelity  to  their  friends,  their  courage,  and  their  fortitude.  Civ- 
ilized nations  are  each  possessed  of  certain  characteristic  vices 
which  can  scarcely  be  apologized  for,  much  less  defended.  One 
who  thinks  that  the  peculiar  virtues  of  the  savage  and  the  pecu- 
liar vices  of  the  civilized  man  are  the  important  virtues  and 
vices  will  certainly  reach  the  conclusion  that  the  savage  is 
really  superior  morally  to  the  civilized  man.  But  it  is  very 
easy  to  be  mistaken  in  one's  emphasis.  We  need  to  consider 
carefully  what  qualities  really  give  superiority  to  a  people. 

Our  present  problem  is  to  form  some  sort  of  intelligent  opin- 
ion as  to  the  qualities  which  a  people  need  in  order  to  become 
prosperous,  powerful,  and  great  in  an  economic  and  worldly 
sense.  The  following  outline  is  suggested  as  expressing  a  ten- 
tative opinion  on  this  subject.  Whatever  may  be  said  on  purely 
religious  or  moral  grounds,  a  nation  whose  people  are  possessed 
of  these  qualities  in  superior  degree  will  have  an  economic  ad- 
vantage, other  things  equal,  over  a  nation  whose  people  possess 
them  in  less  degree. 

THE  CHARACTERISTICS  OF  A  CAPABLE  RACE 

1.  Knowledge  of 

a.  The  physical  environment 

b.  The  social  environment 

2.  Forethought,  as  shown  by 

a.  Industry 

b.  Thrift 

3.  Dependableness,  made  up  of 

a.  Honesty 

b.  Sobriety 

c.  Courage 

d.  Fidelity 


126  PRINCIPLES  OF  NATIONAL  ECONOMY 

4.  Reasonableness,  as  shown  by 

a.  Eagerness  to  learn 

b.  Obedience  to  law 

c.  Willingness  to  cooperate 

Man  has  achieved  "dominion  over  the  fish  of  the  sea,  and 
over  the  fowl  of  the  air;  and  over  the  cattle,  and  over  all  the 
earth"  by  reason  of  certain  powers  or  qualities  which  he  pos- 
sesses in  higher  degree  than  they.  These  are,  first,  his  greater 
knowledge  of  and  control  over  the  forces  of  nature ;  second,  his 
greater  forethought  in  making  provision  for  the  future  and 
working  for  distinct  ends ;  third,  his  greater  power  of  organi- 
zation, or  teamwork.  This  power  of  organization  is  the  result 
mainly  of  two  factors, — his  dependability  and  his  reasonable- 
ness. The  same  powers,  or  qualities,  have  given  the  civilized 
man  dominion  over  the  savage,  and  the  intellectual  man  domin- 
ion over  the  ignorant  man.  In  the  future,  as  in  the  past,  we 
must  expect  that  the  world  will  be  ruled  by  the  nations  which 
possess  these  qualities  in  the  highest  degree. 

Physical  advantages  over  the  brutes.  Man's  erect  posture, 
leaving  his  hands  free  to  be  used  for  other  purposes  than 
locomotion,  must  be  counted  as  a  great  advantage  over*  the 
brute  creation.  A  thumb  which  opposes  the  fingers  and  gives 
him  a  better  grasp  adds  greatly  to  this  advantage.  These  ad- 
vantages, however,  would  not  count  for  much  if  he  did  not  have 
a  mind  which  enabled  him  to  devise  tools  to  be  grasped  and 
used  with  his  thumbed  hands.  So  far  as  the  upright  posture 
and  the  thumb  are  concerned,  while  they  give  him  an  advantage 
over  the  brutes,  they  alone  do  not  give  the  civilized  man  any 
advantage  over  the  savage.  The  posture  of  the  savage  is  as 
upright  and  his  thumb  as  handy  as  the  civilized  man's.  In 
seeking,  therefore,  the  advantages  which  have  given  the  civi- 
lized man  dominion  over  the  savage  we  must  look  at  the  mental 
and  moral  qualities.  These  are  not  necessarily  physiological  in 
their  nature;  they  may  be  mainly  the  results  of  accumulated 
history,  tradition,  and  training. 


THE  QUALITY  OF  THE  PEOPLE  127 

Intellectual  advantages  of  civilized  men  over  savages.  Knowl- 
edge of  the  forces  of  nature  may  almost  be  said  to  include 
control  over  them,  though  the  erect  posture  and  the  thumb 
assist  in  that  control.  Our  physical  environment  includes  not 
only  the  physical  objects  which  surround  us  but  their  proper- 
ties and  the  forces  which  govern  them  as  well.  To  know  our 
physical  environment,  therefore,  means  to  know  the  properties 
of  matter  and  the  forces  which  operate  in  and  through  it.  In 
short,  this  is  to  have  scientific  knowledge.  It  is  this  which 
underlies  all  our  mechanical  improvements.  Our  social  environ- 
ment includes  human  beings  and  all  their  powers,  charac- 
teristics, habits,  emotions,  etc.  A  knowledge  of  one's  social 
environment  includes  such  a  knowledge  of  man  and  his  ways  as 
to  enable  one  to  work  with  other  men  comfortably,  knowing 
what  to  expect  and  what  to  depend  upon.  This  is  particularly 
important  in  those  who  are  intrusted  with  the  work  of  governing 
•  or  administering  the  affairs  of  government. 

Forethought.  Forethought  is  only  one  aspect  of  what  may 
be  called  the  time  sense.  Among  the  many  definitions  of  man 
is  one  which  says  that  he  is  the  being  "who  looks  before  and 
after."  His  memory  of  the  distant  past  and  his  forethought 
for  the  distant  future  modify  his  actions  in  the  immediate 
present  more  than  the  actions  of  any  other  creature  are  modi- 
fied. But  the  past  cannot  be  changed ;  only  the  future  now 
lies  within  our  control.  Even  industry  is  chiefly  carried  on 
because  of  the  vivid  appreciation  in  the  present  of  those  needs 
which  are  certain  to  arise  in  the  future.  Those  creatures  which 
appreciate  future  needs  most  vividly  will,  of  course,  labor  mest 
assiduously.  The  same  difference  shows  itself  among  men. 
Those  nations,  as  well  as  those  individuals,  who  see  most  clearly 
in  advance  what  their  future  needs  are  likely  to  be  are  the 
nations  and  the  individuals  who  show  the  greatest  industry 
as  well  as  the  greatest  thrift. 

Thrift.  Thrift  differs  from  industry  in  that  it  consists  in 
saving  that  which  is  already  produced  or  possessed,  whereas 


128  PRINCIPLES  OF  NATIONAL  ECONOMY 

industry  consists  in  producing  or  gaining  possession  of  desir- 
able objects.  Even  more  than  industry,  thrift  is  a  mark  of  fore- 
thought. It  requires  an  even  stronger  self-control,  combined 
with  a  keener  sense  of  the  importance  of  future  needs,  to  lead 
one  to  refrain  from  consuming  that  which  is  already  produced 
than  it  does  to  work  to  produce  that  which  does  not  yet  exist. 
However,  the  two  things  must  always  go  together,  in  the  com- 
munity at  least,  if  not  in  the  individual.  The  farmer,  that  is 
some  farmer,  must  save  seed  before  any  farmer  can  labor  suc- 
cessfully at  the  growing  of  next  year's  crop.  One  may,  how- 
ever, save  the  seed  which  another  plants.  There  are  some 
savages  so  thriftless  as  not  to  be  able  even  to  save  seed.  Need- 
less to  say,  their  industry,  even  if  they  were  industrious,  would 
not  count  for  much.  If  cattle  are  benevolently  given  to  them, 
they  kill  them  all  in  time  of  scarcity.  Therefore  they  cannot 
succeed  even  as  herdsmen,  but  fall  back  into  a  lower  economic 
stage  ;  namely,  hunting  and  fishing.  Such  people  are  not  likely  • 
to  grow  powerful  enough  to  occasion  much  uneasiness  to  the 
rest  of  the  world.  Even  if  there  were  no  other  reasons  for 
their  weakness,  they  could  never  support  numbers  enough  to 
be  very  strong. 

Knowledge  and  forethought  are  primarily  mental  qualities, 
though  there  is  an  element  of  morality  in  forethought ;  depend- 
ableness  and  reasonableness  are  primarily  moral  qualities, 
though  there  is  an  element  of  mentality  in  both  of  them.  In 
this  age  of  great  mental  achievements,  especially  in  the  field 
of  physical  science  and  mechanical  invention,  there  is  a  tend- 
ency to  underestimate  the  importance  of  moral  qualities.  This 
tendency  may  have  been  increased  by  the  perception  that  moral 
teachers  themselves  have  sometimes  overemphasized  the  lesser 
virtues — that  is,  those  which  count  least  in  the  improvement 
of  social  life — and  underemphasized  the  greater,  that  is,  those 
which  count  most. 

Moral  advantages  of  civilized  men  over  savages, — dependable- 
ness.  Nothing  can  be  more  important  in  the  building  of  a  great 
and  prosperous  nation  than  dependableness.  Many  writers 


THE  QUALITY  OF  THE  PEOPLE  129 

have  taken  pains  to  point  out  how  dependent  we  are  upon  one 
another  in  a  highly  civilized  state.  One  way  of  illustrating  this 
mutual  dependence  is  by  comparing  a  highly  developed  society 
to  a  complicated  machine  or  a  highly  developed  animal  organ- 
ism. There  are  many  striking  resemblances,  among  the  most 
important  of  which  is  the  interdependence  of  parts.  This 
interdependence  of  parts  increases  as  we  ascend  in  the  scale  of 
organic  life.  In  the  human  body,  for  example,  or  in  that  of 
any  of  the  higher  mammals  the  interdependence  of  parts  is 
much  greater  than  that  found  in  the  bodies  of  the  lower  forms 
of  life.  The  same  change  is  noticeable  as  we  ascend  in  the 
scale  of  social  life.  Each  individual  tends  to  specialize  in  some 
particular  kind  of  work  and  to  depend  upon  other  individuals, 
who  have  specialized  on  other  kinds  of  work,  to  supply  him 
with  goods  and  services  which  he  cannot  produce  for  himself. 
Some  of  the  reasons  why  this  is  so  advantageous  will  be  dis- 
cussed in  the  chapter  on  The  Division  of  Labor. 

There  can  be  no  great  amount  of  dependence  of  one  upon 
another  where  the  people  are  not  dependable.  This  is  equally 
true  of  a  machine  or  an  animal  organism,  but  we  do  not  attrib- 
ute moral  qualities  to  the  parts  of  any  of  them.  The  wheel  in 
a  machine  has  no  choice.  It  must  of  physical  necessity  do  what- 
ever its  construction  requires  it  to  do.  But  if  the  machine  be  not 
well  made,  so  that  some  part  is  not  compelled  to  work  harmoni- 
ously with  every  other  part,  the  whole  machine  will  work  very 
imperfectly  or  not  at  all.  Similarly,  if  one  part  of  the  animal 
organism,  especially  of  a  highly  developed  organism,  should  fail 
to  perform  its  functions,  every  other  part  is  likely  to  suffer,  and 
the  whole  organism  may  even  die.  Although  there  is  no  physi- 
cal necessity  compelling  a  person  to  be  dependable,  as  is  the 
case  with  the  parts  of  a  well-made  machine  or  the  organs  of 
a  healthy  body,  yet  it  is  just  as  important  that  he  should  be, 
otherwise  civilization  cannot  advance  at  all. 

Our  mutual  dependence  is  of  various  sorts  and  degrees.  If 
someone  fails  to  do  that  which  he  is  expected  to  do,  he  may 
imperil  the  lives  of  hundreds  or  thousands  of  his  fellow  men, 


130  PRINCIPLES  OF  NATIONAL  ECONOMY 

as  in  the  case  of  a  switch  tender  or  a  locomotive  engineer;  he 
may  occasion  the  loss  of  valuable  property  ;  or  he  may,  as  in  the 
case  of  an  unpunctual  person,  merely  upset  our  calculations  and 
cause  many  of  us  to  waste  our  time  waiting  for  him  or  guessing 
what  he  is  likely  to  do.  In  all  these  cases,  in  greater  or  less 
degree,  he  occasions  loss  to  the  nation.  The  time  we  waste  on 
account  of  his  lack  of  dependableness  is  as  truly  a  loss  as  the 
property  which  is  destroyed.  Aside  from  the  direct  loss  of  time 
and  property,  there  is  the  greater  loss  which  comes  from  the 
discouragement  of  enterprise,  the  lack  of  confidence,  and  the 
general  demoralization  which  ensues  when  men  can  no  longer 
rely  upon  one  another.  When  we  can  no  longer  depend  upon 
others  to  do  their  special  work  well  and  regularly,  we  shall  have 
to  learn  to  do  everything  for  ourselves. 

Honesty.  The  first  element  in  dependableness  is  common 
honesty.  Men  who  will  not  keep  their  word,  fulfill  their  con- 
tracts, or  do  business  without  cheating  are  not  only  morally 
odious,  they  are  also  obstructions  to  the  progress  and  prosperity 
of  the  community.  Perhaps  this  is  why  they  are  morally  odious. 
A  community  made  up  of  such  people,  no  matter  how  gifted 
they  might  be  mentally,  could  scarcely  prosper.  No  one  could 
trust  anyone  else,  consequently  there  could  be  no  credit.  Noth- 
ing could  be  bought  or  sold  without  the  closest  and  most  minute 
inspection,  and  this  would  be  laborious  and  therefore  wasteful 
of  time.  There  could  be  no  cooperation  or  teamwork,  but 
everyone  would  have  to  look  after  himself  and  spend  a  great 
deal  of  time  watching  his  dishonest  neighbors.  Among  the 
many  advantages  of  honesty,  therefore,  not  the  least  is  that  it 
is  a  great  labor-saving  device  when  it  is  practiced  throughout  a 
community.  Of  two  communities  which  are  otherwise  equal, 
the  one  within  which  honesty  prevails  will  advance  more  rapidly 
in  prosperity  and  power  than  the  one  in  which  dishonesty 
prevails. 

Sobriety.  Next  to  honesty,  sobriety  is  probably  the  most 
important  element  in  dependableness.  In  a  rudimentary  state 
of  society,  where  each  individual  works  and  acts  most  of  the 


THE  QUALITY  OF  THE  PEOPLE  131 

time  alone,  and  where,  therefore,  there  is  little  interdependence, 
drunkenness  may  not  be  so  vicious  as  it  has  now  become.  In 
our  interlocking  civilization  no  personal  habit  or  vice  so  unfits 
a  man  for  usefulness  as  drunkenness.  If  you  had  to  take  your 
choice  between  riding  behind  a  locomotive  engineer  who  was 
addicted  to  drunkenness  and  riding  behind  one  who  was  ad- 
dicted to  any  other  vice,  there  is  not  much  doubt  as  to  which 
you  would  choose.  If  you  had  to  take  your  choice  between  a 
chauffeur  who  was  in  the  habit  of  getting  drunk  and  one  who 
had  formed  any  other  bad  habit  whatsoever,  you  would  not  be 
likely  to  take  the  drunkard.  Apply  a  similar  test  to  anyone  in 
any  of  the  hundreds  of  responsible  positions  and  you  will  reach 
the  conclusion  that  the  person  who  is  addicted  to  drink  is  about 
the  least  desirable  citizen  you  can  name.  There  are  fewer 
places  where  he  is  of  any  use  and  more  where  he  is  a  menace 
than  is  the  case  with  the  victims  of  any  other  vice.  Whatever 
you  may  think  when  you  are  discussing,  in  the  abstract,  the 
relative  harmfulness  of  various  vices,  you  are  not  likely  to  be 
much  in  doubt  when  you  come  to  a  concrete  case  like  that  of  a 
locomotive  engineer,  a  switchman,  a  driver  of  an  automobile,  or 
even  a  janitor  or  anyone  else  whose  lack  of  dependableness 
might  endanger  your  life.  Sobriety  must  obviously  rank  high 
among  the  virtues  which  go  to  make  up  what  we  have  called 
dependableness. 

Courage.  Courage  is  the  father  of  many  virtues,  as  fear  is 
of  many  vices.  It  is  probable  that  as  many  falsehoods  result 
from  fear  as  from  malice.  In  any  kind  of  emergency  you  will 
want  dependable  companions  who  will  not  fail  you.  Their  de- 
pendableness will  be  in  proportion  to  their  courage.  Even  your 
own  courage  may  depend  partly  upon  their  courage,  and  theirs 
upon  yours;  that  is  to  say,  when  you  feel  that  you  can  rely 
upon  one  another  you  will  all  feel  more  courageous  and  more 
capable  of  coping  with  a  difficult  situation  than  if  each  of  you 
doubts  the  courage  of  the  others.  This  applies  not  only  to  physi- 
cal courage  in  a  time  of  physical  danger  but  to  moral  courage  in 
times  when  the  larger  interests  of  society  are  at  stake.  Men  of 


132  PRINCIPLES  OF  NATIONAL  ECONOMY 

little  courage  fear  to  come  out  on  the  right  side,  and  even  men 
of  real  courage  have  their  confidence  shaken  by  the  feeling  that 
they  cannot  depend  upon  their  fellow  citizens. 

Fidelity.  Fidelity  is  closely  related  both  to  honesty  and  to 
courage  and  serves  much  the  same  purpose.  It  is  the  quality 
which  keeps  faith  even  though  one  might  gain  some  individual 
advantage  by  breaking  faith.  The  habit  of  breaking  faith  or 
abusing  confidence  demoralizes  a  group  or  a  community  and 
makes  any  kind  of  effective  teamwork  impossible. 

There  are  doubtless  many  other  elements  which  contribute 
to  the  dependableness  of  a  people,  but  the  four  mentioned  are 
the  principal  ones.  Any  group  of  people  who  possess  these  four 
in  high  degree  can  rely  upon  and  cooperate  with  one  another 
and  carry  out  any  form  of  teamwork  which  they  have  the  intel- 
ligence to  plan.  A  community  whose  people  are  weak  in  any 
one  of  these  four  qualities  will  have  difficulty  in  carrying  out 
any  effective  scheme  of  group  action,  no  matter  how  clearly 
they  perceive  the  advantage  of  doing  so.  While  these  are  moral 
qualities,  nevertheless  the  economic  prosperity  of  the  nation 
depends  upon  them.  They  are,  therefore,  of  just  as  much 
interest  to  the  economist  as  good  tools,  good  land,  or  any 
other  factor. 

Reasonableness.  Reasonableness  is  a  noticeable  character- 
istic of  progressive  people,  as  its  absence  is  of  unprogressive 
people.  It  includes  freedom  from  prejudice,  passion,  and  super- 
stition, and  willingness  to  take  a  sensible  view  of  things  and  to 
be  guided  by  sound  judgment  rather  than  by  stubbornness  and 
general  contrariness.  It  is  opposed  equally  to  the  slavish  fol- 
lowing of  old  customs,  on  the  one  hand,  and  blind  and  headlong 
pursuit  of  new  fads,  on  the  other.  It  involves  a  frank  recogni- 
tion of  all  the  necessary  conditions  of  social  life  and  teamwork 
and  a  willingness  to  submit  to  those  conditions  even  at  some 
inconvenience  to  self.  It  involves  the  willingness  to  help  in  any 
genuine  reform  movement,  even  at  some  loss  or  danger  to  self, 
and  likewise  a  recognition  of  the  necessary  and  legally  consti- 
tuted methods  of  effective  reform. 


THE  QUALITY  OF  THE  PEOPLE  133 

Teachableness.  The  first  element  in  reasonableness  is  teach- 
ableness, or  eagerness  to  learn,  especially  to  learn  better  ways 
of  doing  the  work  which  we  have  to  do.  Travelers  among  back- 
ward races  give  many  strange  accounts,  not  simply  of  the  inef- 
fective methods  of  work,  which  we  might  expect,  but  of  the 
unwillingness  of  the  people  to  learn  new  ways  even  when  they 
are  shown.  One  railroad  builder  who  was  forced  to  employ 
native  labor  in  a  backward  country,  which  need  not  be  named, 
found  that  they  were  accustomed  to  carry  all  burdens  on  their 
heads.  In  moving  dirt  they  insisted  even  on  carrying  it  in  boxes 
and  various  receptacles  on  their  heads.  He  supplied  them  with 
wheelbarrows  and  gave  orders  that  they  were  to  use  these  and 
nothing  else.  They  used  the  wheelbarrows,  but  carried  them 
also  on  their  heads ;  and  nothing  could  induce  them  to  change 
their  immemorial  custom.  Another  story  from  another  back- 
ward country  relates  how  an  enterprising  American  undertook 
to  substitute  some  well-made  American  carts  for  the  exceed- 
ingly clumsy  and  inefficient  carts  then  in  use.  The  native  team- 
sters refused  to  adopt  the  innovation,  giving  as  their  reason 
that  the  new  carts  were  too  silent,  that  they  missed  the  screech- 
ing made  by  the  wheels  turning  on  the  heavy  wooden  axles  of 
their  old  carts.  Similar  illustrations  could  be  repeated  by  the 
hundred  if  necessary.  No  nation  whose  people  are  so  unteach- 
able  as  these  illustrations  indicate  is  likely  to  become  pros- 
perous, or  great  in  any  sense,  no  matter  how  well  endowed  it 
may  be  with  natural  resources.  Such  nations  will  always  re- 
main at  the  mercy  of  the  stronger  nations  and  will  survive  only 
because  their  stronger  neighbors  show  enough  moral  self- 
restraint  to  refrain  from  conquering  them. 

This  difficulty  is  not  simply  a  lack  of  knowledge.  It  is  more 
fundamental  than  that.  It  is  a  habit  of  mind  which  resists 
knowledge, — which  refuses  to  accept  knowledge  even  when  it 
is  presented.  Whether  this  is  due  to  some  defect  in  the  physiol- 
ogy of  the  people  or  merely  to  bad  teaching  in  the  past  it  may 
be  difficult  to  determine.  That  there  are  constitutional  differ- 
ences of  this  kind  among  peoples  there  can  be  little  reasonable 


134 


PRINCIPLES  OF  NATIONAL  ECONOMY 


doubt.  To  some  the  pain  of  a  new  idea  is  so  considerable  that 
they  prefer  to  endure  poverty  and  hardship  rather  than  the 
painful  process  of  learning  better  ways  of  doing  things.  To 
others  the  painfulness  of  learning  is  so  slight  as  to  place  no 
obstacles  in  the  way  of  progress.  On  the  other  hand,  a  wise  but 
strong  ruler  who  would  establish  a  system  of  compulsory  edu- 
cation and  rigidly  enforce  it  could  doubtless  accomplish  a  great 
deal  in  the  way  of  increasing  the  teachableness  of  the  people. 
During  their  enforced  schooling  they  would  form  the  habit  of 
learning,  and  the  pain  of  a  new  idea  would  be  greatly  reduced. 
A  wise  majority  in  a  democracy  might  do  the  same  thing  for 
an  unwise  minority. 

Even  in  what  passes  for  a  progressive  nation  and  among 
people  who  are  ranked  as  moderately  intelligent  there  survive 
many  practices  which  can  be  regarded  only  as  superstitions. 
Some  farmers  still  plant  their  potatoes  in  the  dark  of  the  moon 
rather  than  when  the  soil  and  the  weather  conditions  are  right. 
Others  observe  ceremonies  of  various  kinds  which  have  not  the 
slightest  relation  to  the  laws  of  plant  or  animal  growth.  Still 
others  refuse  to  submit  to  rules  or  to  adopt  practices  which 
have  been  proved  to  have  scientific  value,  either  because  it  is 
contrary  to  their  religion  or  because  it  is  not  the  way  they  and 
their  fathers  have  always  done.  Among  others  besides  farmers 
there  is  sometimes  a  prejudice  against  "book  learning,"  even 
after  the  book  learning  has  proved  itself  a  practical  thing. 

Covetousness.  There  is  another  form  of  unreasonableness, 
and  it  is  probably  the  most  destructive  of  all,  which  takes  the 
form  of  jealousy  or  resentfulness  at  the  success  of  other  people. 
It  is  the  worst  form,  perhaps  the  only  real  form,  of  covetous- 
ness.  There  are  few  things  which  so  deaden  the  enterprising 
and  constructive  spirit  of  a  people  as  this  form  of  resentfulness, 
and  there  are  few  things  which  so  encourage  that  spirit  as  a 
generous  appreciation,  on  the  part  of  everyone,  of  real  achieve- 
ment wherever  it  is  found. 

Obedience  to  law.  Another  important  element  in  reasonable- 
ness is  the  recognition  of  the  fact  that  if  we  are  going  to  live 


THE  QUALITY  OF  THE  PEOPLE  135 

together  in  groups  it  is  necessary  for  each  of  us  to  submit  to 
many  regulations,  some  of  them  at  times  irksome,  which  would 
be  unnecessary  if  we  could  live  as  isolated  individuals.  This  is 
commonly  called  obedience  to  law.  This  need  not  be  a  slavish 
acceptance  of  all  laws  as  they  now  stand,  but  it  at  least  involves 
a  recognition  of  the  orderly  and  legally  constituted  methods  of 
changing  laws,  rather  than  a  stubborn  and  brutal  defiance  of 
those  which  we  do  not  happen  to  like.  The  purpose  of  law  is 
not  to  repress  or  obstruct,  but  to  make  free, — to  release  energy. 
The  traffic  policeman  on  a  crowded  street  corner  may  be  taken 
as  a  good  illustration  of  all  enforcement  of  law.  He  is  not 
there  to  obstruct  or  hinder  traffic,  though  he  undoubtedly  does 
hinder  some  unreasonable  people  from  doing  what  they  would 
like  to  do.  But  as  the  result  of  such  hindrances  traffic  can 
move  more  freely  than  it  could  without  them,  and  thus  the 
average  person  actually  enjoys  greater  freedom  of  movement 
than  would  otherwise  be  possible.  A  reasonable  person  always 
recognizes  this  fact  and  submits  to  such  regulations.  Only  an 
unreasonable  person  finds  them  irksome  or  refuses  a  willing 
obedience. 

The  world  has  generally  been  dominated  by  peoples  who 
were  law-abiding.  No  nation  whose  people  refuse  to  submit  to 
the  necessary  regulations  could  ever  hope  to  grow  prosperous 
or  powerful  enough  to  play  much  of  a  part  in  civilization.  It 
would  be  as  reasonable  to  expect  a  disorganized  mob,  each  in- 
dividual of  which  followed  his  own  whims,  to  succeed  against 
a  well-organized  and  well-disciplined  army.  The  type  of  dis- 
cipline and  regulation  is  different,  but  the  necessity  is  just 
as  great  in  a  nation  at  peace  as  in  a  nation  at  war.  The  results 
of  a  lack  of  discipline  come  more  quickly  in  war  than  in  peace, 
but  they  are  no  more  certain  in  the  one  case  than  in  the  other. 
It  is  particularly  important  that  this  kind  of  reasonableness 
shall  exist  in  a  democracy.  Under  a  despotism  the  subjects  may 
be  compelled  by  fear  to  submit  to  regulations;  in  a  democracy 
submission  must  be  largely  voluntary.  In  other  words,  it 
depends  upon  the  reasonableness  of  the  people. 


136  PRINCIPLES  OF  NATIONAL  ECONOMY 

Willingness  to  cooperate.  Willingness  to  cooperate  where 
cooperation  is  desirable,  even  without  legal  compulsion,  is  a 
very  important  factor  in  the  prosperity  of  any  community. 
Even  where  everyone  agrees  that  cooperation  is  needed  it  is 
frequently  difficult  to  get  people  to  cooperate  for  community 
work.  The  reasons  are  many,  and  some  of  them  are  hard  to 
understand.  Personal  jealousies,  old  grudges,  mutual  distrust, 
and  even  general  all-round  meanness  are  given  as  the  principal 
reasons.  It  is  sometimes  said  that  the  lack  of  leaders  is  the 
great  difficulty.  It  is  quite  as  frequently  the  lack  of  followers. 
Everyone  wants  to  be  a  leader  and  is  not  willing  to  follow  any- 
one else.  One  of  the  vices  of  democracy  shows  itself  in  many 
cooperative  enterprises.  Instead  of  supporting  a  leader  who 
really  knows  what  ought  to  be  done  and  how  to  do  it,  it  fre- 
quently happens  that  the  only  leader  who  can  win  support  is 
the  one  who  can  wheedle  the  different  factions  into  a  coopera- 
tive mood.  His  fitness  does  not  consist  in  the  fact  that  he  is 
an  expert  in  the  work  which  is  to  be  done  by  the  group,  but  in 
the  fact  that  he  is  an  expert  in  the  arts  of  persuasion, — that  he 
is  the  only  one  who  can  overcome  the  unwillingness  of  the  vari- 
ous factions  to  cooperate.  If  they  were  willing  to  cooperate 
this  sort  of  leader  would  not  be  a  necessity,  and  they  could  then 
choose  a  leader  who  was  an  expert  in  the  work  to  be  done. 

Even  in  the  larger  sense  the  nation  is  weak  if  it  must  be  led 
by  one  who  knows  very  little  about  the  actual  business  in  hand, 
but  knows  only  how  to  placate  various  factions  and  persuade 
them  to  undertake  the  work  before  them.  With  such  a  spirit 
among  the  people  the  indispensable  man  is  more  likely  to  be 
the  orator  or  the  persuader  than  the  statesman  or  the  adminis- 
trator. A  people  among  whom  the  efficient  man  is  popular  will 
never  be  outstripped  in  the  arts  of  peace  or  beaten  in  war  by  a 
people  among  whom  only  a  demagogue  or  even  a  persuasive 
orator  can  be  popular.  A  people  who  lack  the  willingness  to 
cooperate  in  the  carrying  out  of  great  national  plans  and  pro- 
grams must  be  persuaded  or  placated.  Lacking  a  despot,  their 


THE  QUALITY  OF  THE  PEOPLE  137 

first  need  is  for  someone  who  can  wheedle  them  into  doing  that 
which  they  ought  to  be  willing  to  do  without  wheedling.  Noth- 
ing more  unerringly  indicates  the  quality  of  the  people  than 
the  kind  of  leaders  they  pick  out  °r  follow.  If  they  habitually 
allow  themselves  to  be  led  by  men  who  are  proficient  merely 
in  the  arts  of  persuasion,  they  are  a  weak  people.  Even  that 
which  is  sometimes  called  executive  ability  and  which  is  too 
often  a  convenient  excuse  for  much  stupidity  is  made  necessary 
mainly  because  people  are  too  weak  and  vacillating  to  do  what 
they  ought  to  do  without  a  great  deal  of  looking  after.  If  the 
people  choose  as  their  leaders  men  who  have  clear -and  sound 
ideas  and  marked  scientific  or  constructive  ability,  regardless  of 
their  proficiency  either  in  the  arts  of  persuasion  or  in  the  bluster 
of  the  "  great  executive,"  they  are  a  strong  people.  As  the  late 
William  James,  pointed  out,  one  of  the  purposes  of  an  education 
is  to  enable  us  to  pick  out  a  good  man. 

If  we  are  clear  in  our  minds  as  to  a  few  of  the  leading  quali- 
ties which  a  capable  race  must  possess,  the  next  question  is, 
How  may  a  nation  improve  or  preserve  its  capacity  for  great- 
ness? Our  original  qualities  depend  mainly  upon  heredity ; 
our  acquired  qualities,  upon  education.  Education  depends 
mainly  upon  the  educational  system  and  the  advantages  which 
civilization  provides  for  the  accumulation  and  transmission  of 
knowledge.  Few  of  us,  unless  we  have  thought  seriously  about 
it,  realize  how  much  of  our  present  knowledge  is  due  to  the 
art  of  printing.  By  means  of  the  printed  book  the  knowledge 
acquired  by  one  generation  may  be  stored  up  and  bequeathed  to 
future  generations.  Without  the  printed  book  it  would  have  to 
be  transmitted  from  generation  to  generation  on  the  thin  air 
by  means  of  the  spoken  word.  Much  that  is  wonderful  has 
been  transmitted  orally,  but  much  also  has  been  lost.  Such  a 
thing  as  a  lost  art  is  scarcely  possible  in  this  age  of  printing 
presses.  But  while  much  of  our  knowledge  is  due  to  the  art 
of  printing,  more,  perhaps,  is  due  to  the  organized  plans  for 
training  each  generation  during  its  growing  period.  A  school 


138  PRINCIPLES  OF  NATIONAL  ECONOMY 

system  which  gives  each  and  every  child  just  the  training  which 
he  needs  to  fit  him  for  the  greatest  usefulness  is  the  dream  of 
all  educators. 

Heredity  and  training.  A  great  deal  has  been  written  regard- 
ing the  comparative  importance  of  heredity  and  training  in  the 
determination  of  ability  and  character.  Some  have  gone  to 
the  extreme  of  saying  that  heredity  is  everything,  that  a  genius 
will  always  become  a  genius  in  spite  of  the  lack  of  educational 
advantages, — in  short,  that  he  will  find  his  own  means  of 
education.  Others  have  gone  so  far  as  to  deny  that  heredity 
has  anything  to  do  with  a  man's  ability ;  they  claim  that  it  is 
all  in  his  education,  including  under  education  all  the  influences 
that  have  been  at  work  since  his  birth  in  developing  his  mind 
and  shaping  his  character.  The  truth,  as  in  most  such  cases, 
seems  to  be  somewhere  between  these  extremes.  There  is  no 
doubt  whatever  that  men  of  average  natural  ability  may  be 
greatly  improved  by  education  and  training,  nor  is  there  any 
reasonable  doubt  that  some  are  capable  of  being  trained  much 
more  highly  than  others  because  of  a  difference  in  natural 
ability. 

If  we  consider  certain  special  fields  of  study — for  example, 
music  or  mathematics — few  will  doubt  that  there  are  differ- 
ences in  natural  talent  for  these  studies.  Any  normal  person  can 
acquire  some  skill  in  either  of  these  fields,  but  there  are  some 
who  are  so  deficient  in  natural  talent  for  one  or  the  other  that 
no  amount  of  training  would  ever  enable  them  to  become  highly 
proficient.  There  is  a  strong  probability  that  the  same  may  be 
said  of  any  special  kind  of  ability  or  skill  which  might  be 
named,  but  in  our  complex  civilization  so  many  kinds  of  ability 
and  skill  are  required  that  almost  anyone  can  find  some  field 
of  work  in  which  he  may  become  skilled,  though  there  may  be 
no  good  market  for  the  kind  of  work  in  which  he  excels  or  there 
may  be  so  many  others  possessing  the  same  kind  of  ability  as  to 
overstock  the  market.  In  either  case  the  individual,  however 
skillful  or  capable  in  that  special  field,  may  find  it  hard  to  make 
a  living. 


THE  QUALITY  OF  THE  PEOPLE  139 

Whatever  may  be  said  regarding  the  relative  importance  of 
the  natural  ability  of  the  people  and  their  training,  it  is  abso- 
lutely certain  that  it  is  more  important  for  the  present  genera- 
tion to  give  attention  to  the  problem  of  its  own  training  than  to 
the  problem  of  its  own  heredity.  The  latter  cannot  now  be 
changed,  and  there  is  no  use  worrying  about  it.  The  only  thing 
to  do  is  to  make  the  most  of  its  inheritance  and  see  that  it  gets 
the  best  possible  training.  But  when  we  look  to  the  future, 
there  is  much  to  be  said  in  favor  of  giving  attention  to  the 
question  of  the  heredity  of  future  generations.  If  the  most 
capable  men  and  women  of  this  and  succeeding  generations 
marry  and  have  larger  families  than  the  less  capable,  and  if  the 
least  capable,  the  feeble-minded,  and  the  defective  are  prevented 
from  reproducing  their  kind,  we  may  expect  a  gradual  im- 
provement, generation  after  generation,  in  the  native  and  in- 
herited quality  of  the  stock.  If,  on  the  other  hand,  many  of  the 
most  capable  do  not  marry  at  all,  and  if  the  others  marry  late 
and  have  small  families,  whereas  the  less  capable  have  larger 
families,  while  the  feeble-minded  and  defective  multiply  most 
rapidly  of  all,  we  must  expect  a  gradual  deterioration  in  the 
stock,  generation  after  generation. 

The  age  of  marriage.  Aside  from  the  difference  in  the  size 
of  families  the  mere  difference  in  the  age  of  marriage  will  make 
a  great  difference  in  the  rate  of  increase  of  different  classes.  Let 
us  suppose,  for  example,  that  there  are  two  groups  of  people, 
which  we  will  call  groups  A  and  B,  containing  a  thousand  per- 
sons each,  each  group  having  different  habits  with  respect  to 
the  age  of  marriage.  In  group  A  marriage  takes  place  so  early, 
on  the  average,  that  there  is  an  average  of  twenty-five  years 
between  generations.  That  is,  the  average  parent  is  just  twenty- 
five  years  older  than  the  average  child,  enough  children  being 
born  before  the  parents  are  twenty-five  to  balance  those  who  are 
born  afterward.  In  group  B,  on  the  other  hand,  marriages  take 
place  so  late  that  there  is  an  average  of  thirty-three  and  a  third 
years  between  generations.  Let  us  assume,  further,  that  the 
number  of  children  brought  to  maturity  in  the  average  family  is 


140  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  same  in  the  two  groups,  and  that  this  average  number  is 
four ;  that  is,  in  both  groups  the  average  married  couple  brings 
four  children  to  maturity  and  marries  them  off.  The  total  num- 
ber in  each  group,  therefore,  doubles  in  each  generation.  But 
group  A  will  double  four  times  in  a  hundred  years,  whereas 
group  B  will  double  only  three  times.  Under  these  circum- 
stances group  A  will  have  increased  from  one  thousand  to  six- 
teen thousand  at  the  end  of  a  hundred  years,  whereas  group  B 
will  have  increased  to  only  eight  thousand.  If,  in  addition  to 
this,  group  B  should  have  fewer  children  on  the  average,  so  that 
they  doubled  only  once  in  two  generations,  the  contrast  would 
be  still  greater.  In  this  case  they  would  number  fewer  than 
three  thousand  at  the  end  of  a  hundred  years.  If,  through  so 
many  failing  to  marry  at  all  and  the  rest  having  so  few  chil- 
dren, they  should  not  increase  at  all  from  generation  to  genera- 
tion, the  two  groups,  at  the  end  of  the  century,  would  bear  the 
ratio  of  16  to  i.  Now  it  is  rather  obvious,  is  it  not,  that  it 
makes  a  great  deal  of  difference  whether  group  A  represents 
the  more  capable  men  and  women  in  our  nation  and  group  B 
the  less  capable,  or  vice  versa  ? 


CHAPTER  VIII 
THE  GEOGRAPHICAL  SITUATION 

The  human  factor  is  the  most  important  factor  in  national 
prosperity.  Nevertheless  the  natural  situation  is  a  factor  which 
must  be  taken  into  consideration.  However  gifted  and  cour- 
ageous a  race  may  be,  it  will  find  it  easier  to  expand  and  become 
prosperous,  powerful,  and  great  in  a  favorable  than  in  an 
unfavorable  environment. 

Importance  of  environment.  But  what  is  a  favorable  en- 
vironment ?  It  is  easy  to  overemphasize  the  bodily  comfort  of 
living  in  a  warm  as  opposed  to  a  hot  or  a  cold  climate  and  to 
ignore  the  bracing  effects  of  changeable  weather.  It  is  also  easy 
to  overemphasize  the  tremendous  productivity  of  certain  tropi- 
cal regions  and  to  forget  that  they  produce  the  enemies  as  well 
as  the  friends  of  man  in  great  profusion.  It  is  equally  easy  to 
go  too  far  in  the  opposite  direction  and  to  hold  that  hard  condi- 
tions, such  as  a  harsh  climate  and  a  sterile  soil,  are  best  for 
man's  development.  If  hard  conditions  are  all  that  men  need 
the  Eskimos  of  the  Far  North  are  peculiarly  blessed. 

Advantages  of  the  temperate  zones.  If  we  take  everything 
into  consideration  it  is  probable  that  the  temperate  zones  are 
most  favorable  to  man's  development,  as  well  as  to  his  pros- 
perity. He  has  here  fewer  unconquerable  enemies  than  in  the 
tropics  or  in  the  frigid  zones.  He  finds  a  wider  variety  of  use- 
ful materials,  such  as  grass,  timber,  and  minerals,  and  he  finds 
them  in  greater  abundance  here  than  elsewhere.  Here  the 
advantages  to  be  gained  by  work  are  more  obvious  and  more 
easily  comprehended  by  the  average  intellect  than  anywhere 
else.  The  intelligence  required  to  see  the  advantage  of  building 
shelters,  making  clothing,  and  kindling  fires,  especially  in  a 

141 


142  PRINCIPLES  OF  NATIONAL  ECONOMY 

place  where,  along  with  the  cold  weather,  there  is  an  abundance 
of  material  suitable  for  these  purposes,  is  not  very  great.  It 
requires  much  more  scientific  knowledge  to  enable  men  to 
guard  against  the  hookworm  and  the  various  harmful  bacteria 
which  infest  the  tropics.  These,  together  with  venomous  in- 
sects and  reptiles,  not  to  mention  the  larger  beasts  of  prey,  im- 
peril the  lives  of  the  dwellers  in  the  tropics  quite  as  much  as 
our  cold  winters  imperil  the  lives  of  dwellers  in  these  northern 
latitudes.  ^ 

Northern-grown  crops  are  generally  best.  It  is  a  fact  of 
observation,  however  we  may  account  for  it,  that  many  of  our 
farm  crops  reach  their  highest  perfection  very  near  the  northern 
limits  of  the  areas  within  which  they  can  be  grown  without 
injury  from  frost.  The  Cotton  Belt  of  this  country,  though  con- 
fined to  the  Southern  states,  is  in  reality  near  the  northern  limit 
for  cotton.  Our  Corn  Belt  is  likewise  near  the  northern  limit 
for  corn.  The  oranges  of  California  and  Florida  are  likewise 
grown  near  the  line  where  frost  will  destroy  the  crop.  The 
potato  and  the  sugar  beet  do  better  either  in  high  altitudes  or  in 
high  latitudes,  where  the  summers  are  barely  warm  enough  and 
the  seasons  barely  long  enough  to  mature  the  crop.  One  ex- 
planation of  this  general  rule  is  that  by  migrating  northward 
a  plant  escapes  many  of  its  ancient  and  hereditary  enemies. 
When  seed  corn  is  saved,  dried,  and  protected  during  the  winter, 
and  special  care  given  it  during  the  growing  season,  it  can  grow 
farther  north  than  would  be  possible  if  it  had  to  shift  for 
itself.  Its  natural  enemies  in  its  original  habitat,  not  having 
man's  help,  cannot  live  over  winter  or  mature  between  frosts  in 
our  Corn  Belt.  Therefore  the  corn  plant  escapes  some  of  its 
worst  enemies.  The  same  is  true  of  the  cotton  plant,  though 
some  of  its  ancient  enemies  seem  to  be  following  it  northward, 
and  also  of  other  plants  which  seem  to  flourish  under  cultivation 
in  latitudes  where  they  could  not  survive  without  cultivation. 
This  is  one  important  factor  in  enabling  large  numbers  of  men 
to  produce  an  adequate  food  supply  in  northern  latitudes.  Simi- 
larly, when  man  learns  to  keep  himself  warm  by  building  houses, 


THE  GEOGRAPHICAL  SITUATION  143 

manufacturing  clothing,  and  making  fires,  he  can  live  in  lati- 
tudes which  enable  him  to  escape  some  of  his  ancient  and  hered- 
itary enemies,  such  as  the  hookworm  and  the  germs  of  yellow 
fever,  malaria,  etc.  The  northern  limit  of  his  best  development, 
however,  must  coincide  with  the  northern  limits  of  the  produc- 
tion of  abundant  means  of  satisfying  his  multifarious  desires. 
Another  advantage  of  growing  food  crops  as  far  north  as  the 
seasons  will  permit  is  that  during  the  summer  the  days  are 
longer  in  high  than  in  low  latitudes.  This  gives  plants  more 
light  while  they  are  growing.  The  proportion  of  sugar  in  sugar 
beets,  for  example,  seems  to  depend  partly  upon  the  amount 
of  sunlight  which  they  get  while  they  are  growing. 

Buckle's  generalizations.  In  his  famous  work  "The  History 
of  Civilization  in  England"  Henry  Thomas  Buckle  makes  a 
great  deal  of  several  other  factors  in  the  geographical  situation. 
These  he  groups  under  four  heads ;  namely,  climate,  food,  soil, 
and  the  general  aspect  of  nature.  He  goes  to  the  extreme  of 
attributing  to  these  factors  a  controlling  influence  not  only  on 
the  economic  prosperity  of  the  people  but  even  on  their  intel- 
lectual, moral,  and  religious  development  as  well.  Without  fol- 
lowing him  to  these  extremes  we  may  profitably  give  attention 
to  some  of  his  observations  regarding  the  influence  exercised 
by  these  factors  on  the  industrial  development  of  a  people.  No 
one  is  likely  to  deny  that  the  presence  of  cheap  coal  has  had  a 
great  deal  to  do  with  the  economic  development  of  Europe  and 
America,  or  that  the  former  abundance  of  timber  in  this  coun- 
try had  a  great  deal  to  do  with  the  kind  of  houses  we  built  and 
are  still  building.  A  shingled  roof,  for  example,  is  unknown 
except  in  countries  where  timber  has  been  abundant. 

That  ancient  civilizations  arose  in  regions  where  labor  applied 
to  land  was  highly  productive  is  a  commonplace  in  history. 
The  fertile  river  valleys  of  Egypt,  Mesopotamia,  India,  and 
China  supported  civilizations  when  our,  European  ancestors 
were  still  savages.  Here  food  was  so  abundant  that  men  had 
time  to  do  other  things  besides  satisfying  their  immediate  daily 
needs ;  or,  rather,  a  part  of  the  population  could  produce  food 


144 


PRINCIPLES  OF  NATIONAL  ECONOMY 


enough  to  support  the  rest  while  the  latter  gave  their  time  to 
other  things.  Art,  architecture,  philosophy,  religion,  and  gov- 
ernment could,  therefore,  flourish.  The  civilizations  which  have 
grown  up  since  then  in  latitudes  farther  north  may  not  have 
exceeded  those  earlier  civilizations  in  physical  magnificence, 
but  they  have  exceeded  them  in  all  that  makes  for  the  comfort 
and  well-being  of  the  average  man. 

On  the  other  hand,  the  overpowering  influence  of  the  terrific 
productiveness  of  nature  in  certain  tropical  regions  is  sufficient 
to  discourage  man's  enterprise.  Kipling's  story  entitled  "Let- 
ting in  the  Jungle1"  gives  a  vivid  picture  of  the  way  in  which 
the  jungle  struggles  to  reassert  itself, —  to  flow  back,  as  it  were, 
upon  a  cleared  area  and  overwhelm  it  as  with  a  flood  of  rank 
vegetation.  Concerning  India;  Buckle  writes  : 

Besides  the  dangers  incidental  to  tropical  climates,  there  are  those 
noble  mountains  which  seem  to  touch  the  sky,  and  from  whose  sides 
are  discharged  mighty  rivers  which  no  art  can  divert  from  their 
course  and  which  no  bridge  has  ever  been  able  to  span.  There,  too, 
are  impassable  forests,  whole  countries  lined  with  interminable  jungle, 
and  beyond  them,  again,  dreary  and  boundless  deserts, —  all  teaching 
man  his  own  feebleness  and  his  inability  to  cope  with  natural  forces. 
Without,  and  on  either  side,  there  are  great  seas,  ravaged  by  tempests 
far  more  destructive  than  any  known  in  Europe,  and  of  such  violence 
that,  it  is  impossible  to  guard  against  their  effects.  And  as  if  in 
those  regions  everything  combined  to  cramp  the  activity  of  man, 
the  whole  line  of  coast  from  the  mouth  of  the  Ganges  to  the  extreme 
south  of  the  peninsula  does  not  contain  a  single  safe  and  capacious 
harbor,  not  one  port  that  affords  a  refuge  which  is  perhaps  more 
necessary  there  than  in  any  other  part  of  the  world. 

In  contrast  with  India,  Buckle  points  to  Greece  as  a  country 
where  everything  invites  man  to  dominate.  There  is  nothing 
to  terrify  or  overwhelm  him.  Everything  tends  to  exalt  the 
dignity  of  man,  while  in  India  everything  tends  to  depress  it. 

The  zone  of  the  founders  of  religion.  Peschel,  in  his  "  Races 
of  Man,"  quotes  from  an  old  Arabian  geographer  who  divided 

xln  "The  Second  Jungle  Book." 


THE  GEOGRAPHICAL  SITUATION  145 

the  earth  into  zones,  one  of  which,  that  between  19°  and  33°  49' 
north  latitude,  was  the  zone  of  the  founders  of  religion.  He 
points  out  that  in  this  zone  were  born  all  the  great  founders  of 
religion  and  all  the  philosophers  and  scholars,  himself  included. 
Zoroaster,  Moses,  Buddha,  Christ,  and  Mohammed  were  all 
born  in  that  zone.  Regarding  the  influence  of  the  desert  upon 
the  mind,  Peschel  writes : 

All  who  have  been  in  the  desert  exalt  its  beneficent  influence  on 
the  health  and  spirits.  Aloys  Sprenger  declares  that  the  air  of  the 
desert  invigorated  him  more  than  that  of  the  high  Alps  or  of  the 
Himalayas.  .  .  .  The  desert  has  impressed  the  Arabs  with  their  re- 
markable historical  character.  In  the  boundless  plains  the  imagina- 
tion which  guides  the  youth  of  men  is  filled  with  images  quite 
different  from  those  suggested  by  forest  country.  The  thoughts  thus 
acquired  are  noble  rather  than  numerous.  .  .  :  Every  traveler  who 
has  crossed  the  deserts  of  Arabia  and  Asia  Minor  speaks  enthusi- 
astically of  their  beauties.  All  praise  their  atmosphere  and  brightness 
and  tell  of  a  feeling  of  invigoration  and  a  perceptible  increase  of 
intellectual  elasticity ;  hence,  between  the  arched  heaven  and  the 
unbounded  expanse  of  plain,  a  monotheistic  frame  of  mind  necessarily 
steals  upon  the  children  of  the  desert. 

Professor  Ellsworth  Huntington,1  on  the  other  hand,  finds 
greater  stimulus  to  mental  activity  in  a  changeable  climate 
with  frequent  variations  of  temperature. 

The  geographical  advantages  of  the  United  States.  Coming 
to  our  own  country,  we  have  a  combination  of  most  of  the 
geographical  factors  mentioned  by  Buckle  and  others.  We  have 
the  broken  landscape,  low  mountain  ranges,  and  small  rivers 
of  the  Atlantic  seaboard  ;  the  great  fertile  valley  of  the  Missis- 
sippi and  its  tributaries,  the  vast  plains  of  the  great  West,  the 
semidesert  conditions  of  the  Southwest,  the  towering  mountain 
ranges  of  the  Rockies  and  the  Sierras,  and  the  mild  climate  and 
gentle  slopes  of  the  Pacific  coast.  If  the  mind  of  man  is  strongly 

irThe  Pulse  of  Asia.  See  also  "Climatic  Changes  and  Agricultural  Exhaus- 
tion as  Elements  in  the  Fall  of  Rome,"  Quarterly  Journal  of  Economics, 
February,  1917. 


I46  PRINCIPLES  OF  NATIONAL  ECONOMY 

influenced  by  its  geographical  surroundings,  we  have  an  oppor- 
tunity of  developing  a  many-sided  and  variegated  civilization. 

The  eastern  half  of  the  United  States,  being  virtually  sur- 
rounded on  three  sides  by  water,  like  the  greater  part  of  Europe, 
is  assured  of  an  adequate  quantity  of  moisture;  the  western 
half  is  more  or  less  deficient  in  moisture,  except  the  extreme 
northwest  corner  and  certain  high  mountain  altitudes.  These 
arid  and  semiarid  regions,  where  the  streams  do  not  supply 
water  enough  for  irrigation,  may,  in  places  where  conditions 
are  favorable,  be  made  to  grow  crops  under  methods  known  as 
dry  farming.  The  rest  will  probably  be  a  permanent  grazing 
country.  Even  our  irrigable  land,  while  but  a  fraction  of  the 
total,  amounts  to  a  small  empire  in  itself. 

A  broad  strip  running  from  the  Atlantic  seaboard  to  the 
hundredth  meridian,  and  a  little  north  of  the  middle,  comprises 
the  great  grain,  hay,  and  live-stock  region.  Another  broad  strip, 
lying  south  of  this,  is  the  Cotton  Belt.  Along  our  northern 
border  from  Maine  to  northern  New  York  is  a  lumber,  dairy, 
and  potato  region  and  a  natural  summer  playground  for  the 
city  people.  A  continuation  of  this  strip,  including  the  northern 
halves  of  Michigan,  Wisconsin,  and  Minnesota,  is  an  undevel- 
oped region,  formerly  covered  with  forest  but  now  largely  cut 
over.  Most  of  it  is  excellent  land  for  potatoes  and  small 
grains  and  is  capable  of  feeding  a  vast  population.  Another 
undeveloped  strip  along  the  Gulf  coast  from  Florida  to  Texas, 
just  south  of  the  Cotton  Belt,  is  also  largely  cut-over  timber- 
land.  Much  of  this  is  ideal  land  for  fruit  and  truck  farming 
and  the  growing  of  such  great  food  crops  as  sweet  potatoes  and 
peanuts.  Whenever  the  demand  for  food  is  such  as  to  insure  a 
remunerative  price  for  potatoes,  both  white  and  sweet,  almost 
unimaginable  quantities  can  be  grown  along  our  northern  and 
southern  borders  without  interfering  with  the  growing  of  corn, 
wheat,  or  cotton  in  the  belts  which  are  especially  adapted  to 
these  great  crops.  So  far  as  starchy  food  is  concerned  we  have 
opportunities  for  producing  incalculable  quantities.  Animal 
products  also  can  be  produced  in  quantities  sufficient  for  a  pop- 


THE  GEOGRAPHICAL  SITUATION  147 

ulation  very  much  greater  than  the  present,  though  it  is  easy 
for  unthinking  people  greatly  to  exaggerate  the  possibilities  in 
this  direction. 

The  Mississippi  Valley  (that  is,  the  whole  interior  basin  of 
the  country)  is  one  of  the  most  productive  regions  in  the  entire 
world.  In  fact,  it  is  doubtful  if  any  region  of  equal  area  can 
be  found  anywhere  on  the  globe  which  contains  so  great  a 
variety  and  abundance  of  natural  riches,  both  on  the  surface 
and  beneath  the  surface.  This  region  includes  the  greater  part 
of  our  Cotton  Belt,  and  we  produce  nearly  three  fourths  of  the 
cotton  of  the  world.  It  includes  all  of  what  is  known  as  our 
Corn  Belt;  that  is,  the  region  where  corn  is  the  main  crop, 
though  corn  is  grown  in  every  state  in  the  Union.  Corn  is  not 
only  our  most  valuable  crop  but  our  most  valuable  single  prod- 
uct of  any  kind  or  description ;  we  also^  grow  nearly  three 
fourths  of  the  world's  production  of  this,  the  most  magnificent 
of  all  crops.  In  this  region  also  are  the  great  spring-wheat 
areas  of  Minnesota  and  the  Dakotas  and  the  winter-wheat  area 
extending  from  Ohio  to  the  Great  Plains,  reaching  its  greatest 
density  in  Kansas  and  Nebraska.  While  we  produce  on  the 
average  only  between  a  fourth  and  a  third  of  the  world's  total 
wheat  crop,  we  yet  produce  more  than  any  other  single  country 
at  the  present  time.  Aside  from  these  major  crops,  this  region 
is  also  rich  in  a  number  of  minor  crops  and  grows  practically 
everything  which  will  grow  outside  the  tropics. 

Farm  machinery.  The  reasons  for  this  great  productivity 
are,  first,  the  vast  area ;  second,  the  uniform  fertility  of  the 
soil ;  third,  the  uniformly  level  contour,  making  farm  opera- 
tions relatively  easy  and  inexpensive ;  fourth,  the  uniformly 
favorable  climate ;  and,  fifth,  the  general  use  of  farm  machin- 
ery. There  is  probably  no  single  area  in  the  world  where  so 
much  and  such  efficient  farm  machinery  is  used  in  order  to 
supplement  the  labor  of  men. 

In  addition  to  the  natural  ingenuity  of  our  people,  the  general 
smoothness  of  the  land  and  the  favorableness  of  the  climate 
must  be  held  to  account  for  the  use  of  farm  machinery.  The 


148  PRINCIPLES  OF  NATIONAL  ECONOMY 

summers  (especially  the  late  summer  months)  in  this  region 
are  relatively  dry.  This  has  had  an  important  effect  in  encour- 
aging the  use  of  harvesting  and  hay-making  machinery.  In 
some  of  the  countries  of  northwestern  Europe,  where  clear,  dry 
weather  is  rare,  the  curing  of  hay  and  the  drying  of  harvested 
grain  are  more  difficult  problems  than  with  us.  The  quick 
curing  and  rapid  methods  of  harvesting  and  storing  which  are 
familiar  to  us  are  there  impossible. 

Not  the  least  important  feature  of  the  geographical  situation 
of  any  country  is  the  opportunity  which  it  offers  for  specializa- 
tion. This  is  sometimes  called  the  opportunity  for  trade  and 
commerce.  Trade  and  commerce,  however,  are  good  only  be- 
cause they  enable  each  country  or  each  neighborhood  to  special- 
ize in  production ;  that  is,  to  produce  the  things  for  which  it 
is  best  fitted.  This,  would  not  be  possible  without  trade  and 
commerce.  That  is  to  say,  each  neighborhood  would  have  to 
produce  everything  its  people  needed  if  it  could  not  get  some  of 
these  things  from  other  neighborhoods.  When  it  can  get  almost 
anything  it  needs  from  other  neighborhoods,  provided  it  has 
something  to  give  in  exchange,  it  can  then  devote  its  own  ener- 
gies and  resources  to  the  production  of  those  things  in  which  it 
excels,  or  for  which  it  is  best  fitted,  and  exchange  its  surplus 
of  those  things  for  other  things  which  it  happens  to  need.  Spe- 
cialization in  production  depends,  therefore,  on  opportunities 
for  trade  and  commerce. 

A  wide  area  with  great  diversity  of  geographical  conditions, 
such  as  differences  of  temperature,  rainfall,  altitude,  soil,  and 
mineral  deposits,  permits  great  specialization,  provided  the  dif- 
ferent localities  can  exchange  products.  This  is  largely  a  matter 
of  transportation.  A  small  area,  with  little  diversity  of  re- 
sources and,  at  the  same  time,  isolated  with  respect  to  trans- 
portation, would  be  at  a  great  disadvantage.  With  little  diversity 
of  natural  resources  it  would  have  difficulty  in  producing  every- 
thing it  needed.  Isolated  with  respect  to  transportation,  it 
would  have  difficulty  in  getting  from  the  outside  the  things  it 
could  not  produce  at  home. 


THE  GEOGRAPHICAL  SITUATION  149 

COLLATERAL  READING 

ELY,  RICHARD  T.,  HESS,  RALPH  H.,  LEITH,  CHARLES  K.,  and  CARVER, 
THOMAS  NIXON.  The  Foundations  of  National  Prosperity.  New  York,  1917. 
(Four  essays  on  various  aspects  of  conservation,  including  the  conservation  of 
human  resources.) 

MARSHALL,  ALFRED.  Principles  of  Economics  (fifth  edition).  New  York, 
1 907.  (An  exposition  of  fundamental  notions  by  the  leading  English  economists.) 

PIGOU,  A.  G.    The  Economics  of  Welfare.    London,  1920. 

WICKSTEED,  PHILIP.  The  Common  Sense  of  Political  Economy,  Book  I, 
chaps,  i,  ii,  and  iii.  London,  1910.  (A  very  keen  analysis  of  leading  economic 
concepts.) 


PART  II.    ECONOMIZING  THE  FACTORS  OF 
PRODUCTION 


CHAPTER  IX 

THE  INTERRELATION  OF  THE  FACTORS  OF 
PRODUCTION 

However  strongly  we  believe  that  this  is  the  best  possible 
world  and  however  clearly  we  see  that  a  bounteous  nature  has 
provided  for  the  satisfaction  of  many  of  our  needs  we  cannot 
help  acknowledging  that,  at  any  time  and  in  any  place  where 
we  happen  to  be,  some  desirable  things  are  scarce,  some  unde- 
sirable things  are  abundant,  and  some  things  otherwise  desir- 
able are  so  superabundant  as  to  become  undesirable.  That 
being  the  case,  the  obvious  thing  to  do  seems  to  be  to  set  about 
improving  the  situation,  increasing  the  quantity  of  those  desir- 
able things  which  are  scarce,  and  decreasing  the  quantity  of 
those  things  which  are  too  abundant  for  our  well-being  or 
comfort. 

The  rearrangement  of  matter.  Matter  itself  cannot,  of  course, 
be  either  increased  or  diminished  in  quantity.  It  can  be  rear- 
ranged in  such  ways  as  to  become  more  usable  or  less  harmful. 
This  rearrangement  may  take  on  various  forms.  All  the  ele- 
ments which  are  now  in  a  loaf  of  bread  were  formerly  in  the 
soil,  the  water,  and  the  atmosphere.  In  those  forms  they  were 
of  no  use  to  man.  They  have  been  rearranged  and  assembled, — 
their  form  has  been  changed.  This  is  sometimes  called  form- 
utility.  The  wheat  from  which  the  flour  was  made  and  the 
flour  from  which  the  bread  was  made  had  to  be  transported  from 
places  where  there  was  a  superabundance  to  a  place  where 
there  was  a  scarcity,  in  order  that  they  might  become  usable. 
This  is  sometimes  called  place-utility.  Some  goods  have  to  be 
stored  and  preserved.  At  one  time  they  are  so  abundant  as 
to  be  unusable.  At  another  time,  unless  they  were  preserved, 
they  would  be  so  scarce  as  to  cause  hardship  or  even  famine. 


154  PRINCIPLES  OF  NATIONAL  ECONOMY 

Their  utility  is  increased  by  storing  and  preserving  them.  This 
is  sometimes  called  time-utility. 

Time  is  important  as  well  as  place.  A  keen  observer  has 
remarked  that  men  are  engaged  in  the  simple  work  of  moving 
things  from  one  place  to  another.  Whether  they  are  writing 
with  pens,  putting  chemicals  into  test  tubes,  rolling  steel  rails, 
draining  swamps,  or  irrigating  dry  land,  all  that  men  literally 
do  with  their  hands  and  their  muscles  is  to  move  materials. 
They  are  changing  the  space  relations  of  things.  This  observer, 
however,  did  not  see  that  men  are  also  changing  the  time  rela- 
tions of  things,  a  process  which  is  quite  as  important  as  chang- 
ing their  space  relations.  Things  must  not  only  be  moved  from 
one  place  to  another,  they  must  also  be  preserved  and  held  from 
one  time  to  another.  The  time  relations  of  things  are  quite  as 
important  as  their  space  relations. 

Of  course  there  are  methods  and  purposes  in  all  this  moving 
of  things.  The  mind  sees  method  and  purpose  where  the  eye 
sees  only  materials  moving.  One  of  the  wonderful  things  about 
man's  activity  is  the  vast  results  that  follow  a  very  slight  re- 
arrangement of  materials.  By  stirring  the  soil  and  placing 
seeds  in  a  certain  relation  to  it,  the  forces  which  produce  plant 
growth  are  set  to  work  supplying  our  needs.  By  rearranging  a 
few  stones  and  clods  a  stream  may  be  diverted  and  made  to 
water  barren  fields  until  they  blossom  and  bear  fruit,  or  the 
stream  may  be  made  to  turn  a  wheel  and  drive  machinery  which 
can  accomplish  tasks  far  too  great  for  human  muscles.  By 
taking  advantage  of  his  knowledge  man  can,  by  these  slight 
rearrangements  of  matter,  harness  natural  forces  and  compel 
them  to  serve  his  purpose. 

As  stated  above,"  it  is  quite  as  important  that  things  be  pre- 
served and  held  from  one  time  to  another  as  that  they  be  moved 
from  one  place  to  another.  Crops  must  be  preserved  from  the 
harvest  season  until  other  parts  of  the  year ;  seed  must  be  saved 
for  next  year's  planting ;  tools  must  be  made  long  in  advance  of 
their  actual  use,  and  the  process  of  making  tools  is  sometimes 
a  long-drawn-out  process,  involving  the  mining  and  smelting  of 


THE  INTERRELATION  OF  THE  FACTORS          155 

ores,  the  cutting  of  timber,  and  many  other  processes.  In  fact, 
modern  industry  consists  quite  as  much  in  changing  the  time 
relations  of  things  as  in  changing  their  space  relations.  Work 
done  at  different  times  must  be  coordinated  and  fitted  together ; 
products  produced  at  different  times,  as  well  as  at  different 
places,  must  be  brought  together  in  one  time  as  well  as  in  one 
place.  The  failure  to  appreciate  the  full  importance  of  time 
as  a  factor  in  economic  adjustment  is  responsible  for  a  great 
deal  of  faulty  reasoning  and  many  false  conclusions. 

Discriminating  between  friends  and  enemies.  The  general 
purpose  of  all  this  work  of  changing  the  space  and  time  rela- 
tions of  things  is  to  increase  the  objects  of  desire  and  decrease 
the  objects  of  repugnance  in  those  times  and  places  where  we 
choose  to  live.  The  process  of  increasing  the  objects  of  desire 
is  called  production,  and  that  of  decreasing  the  objects  of 
repugnance  is  called  destruction.  Frequently  these  two  proc- 
esses are  so  closely  related  as  to  make  them  difficult  to  separate. 
In  order  to  increase  the  number  of  desirable  plants  we  must 
destroy  their  rivals,  the  weeds,  as  well  as  the  pests  which  feed 
upon  them.  Out  of  the  various  forms  of  animal  and  plant  life 
which  would  live  in  our  neighborhood  we  choose  the  more  de- 
sirable and  make  it  easy  for  them  to  live  and  multiply,  and 
make  it  hard  for  the  less  desirable  to  survive. 

Man  merely  holds  the  balance  of  power  and  uses  his  limited 
physical  strength  and  his  superior  intellect  in  giving  the  advan- 
tage to  his  friends  in  the  subhuman  world  and  in  placing  his 
enemies  at  a  disadvantage.  In  the  field  of  mechanics,  likewise, 
by  moving  a  vast  number  of  pieces  of  matter,  thereby  bringing 
natural  forces  into  play,  he  assembles  powerful  engines.  Then, 
as  in  the  case  of  a  locomotive  engineer,  by  a  very  moderate  pres- 
sure he  moves  a  lever  which  in  turn  sets  powerful  forces  to  work 
serving  his  purpose.  Other  engines  equally  powerful  and  con- 
trolled with  equal  ease  set  powerful  forces  to  work  destroying 
his  enemies,  both  human  and  subhuman. 

One  of  the  labors  of  Hercules,  it  will  be  remembered,  was  to 
clean  the  Augean  stables.  According  to  the  legend  three  thou- 


156 

sand  oxen  had  been  stabled  there  for  thirty  years  and  the  stalls 
had  never  been  cleaned.  Being  required  to  clean  these  stables 
in  one  day,  Hercules  turned  the  rivers  Alpheus  and  Peneus 
through  them  and  thus  accomplished  what  his  monstrous 
strength  would  not  have  enabled  him  to  do  directly.  Very 
commonplace  men  accomplish  greater  engineering  feats  than 
that  nowadays. 

What  hath  man  wrought !  Writers  who  have  wished  to  im- 
press their  readers  with  the  vastness  of  some  political  or  social 
revolution  have  frequently  adopted  the  device  of  picturing 
someone  as  falling,  just  before  the  revolution,  into  a  Rip  Van 
Winkle  sleep  and  awaking  just  after  the  revolution  into  a  new 
world.  His  perplexity  in  trying  to  understand  his  new  sur- 
roundings is  not  only  amusing  but  usually  very  instructive.  We 
need  not  adopt  the  device  of  whisking  someone  through  an 
interval  of  time  in  order  to  impress  him  with  the  change  which 
man  has  wrought  in  his  material  surroundings.  It  is  only  neces- 
sary to  imagine  a  philosophical  savage  transported  over  a  few 
hundred  miles  of  space  and  set  down  in  a  modern  industrial  cen- 
ter. Let  us  imagine  him  on  a  busy  corner  of  some  great  city, 
where  pavements,  street-car  tracks,  curbstones,  and  sidewalks 
have  replaced  the  native  turf ;  where,  instead  of  trees,  tall  build- 
ings of  steel  and  concrete  rise  hundreds  of  feet  into  the  air,  and 
the  narrow  strip  of  blue  between  is  obscured  by  elevated  rail- 
roads, trolley  wires,  poles,  and  other  obstacles;  while  the 
ground  underneath  is  honeycombed  with  cellars  and  subcellars, 
subways  and  sub-subways,  and  a  network  of  sewers,  conduits, 
and  other  subterranean  passages.  In  trying  to  picture  to  our- 
selves the  surprise  and  perplexity  of  our  philosophical  savage 
we  may  arrive  at  some  conception  of  the  magnitude  of  the 
change  which  man  has  wrought  in  his  natural  environment. 

Man,  nature,  and  tools.  The  two  original  factors  in  this  work 
are  man  and  nature, — nature  presenting  the  material  to  be 
worked  upon  and  also  certain  powerful  forces  to  aid  man  in 
his  work,  and  man  furnishing  the  knowledge,  the  ingenuity,  the 
foresight,  the  patience,  and  also  a  certain  amount  of  muscular 


THE  INTERRELATION  OF  THE  FACTORS          157 

or  physical  power  to  work  upon  the  material  which  nature 
furnishes.  Both  the  raw  material  and  the  natural  forces,  in 
their  elemental  state,  are  commonly  included  under  the  name 
"land."  Not  only  the  soil  fertility  and  the  minerals  but  also  the 
sunlight  and  sun  heat,  the  rain  and  the  atmosphere,  are  com- 
monly regarded  as  the  appurtenances  of  land.  The  most  im- 
portant quality  of  land  is  that  of  extension.  Whoever  controls 
a  portion  of  the  earth's  surface  gets  the  benefit  thereby  of  the 
air  which  lies  above  it,  also  of  a  certain  fraction  of  the  sun's 
rays  and  a  certain  portion  of  the  rainfall,  together  with  the  soil 
and  the  subsoil  immediately  below  the  surface  and  the  moisture 
beneath.  -Under  some  systems  of  law  he  owns  also  the  minerals 
which  are  found  anywhere  beneath  the  surface.  In  fact,  owner- 
ship of  land,  under  these  systems,  extends  from  the  center  of 
the  earth  to  the  uttermost  heights  above  the  surface.  However, 
we  are  not,  at  this  point  in  our  discussion,  so  much  interested 
in  what  is  included  in  the  ownership  of  land  as  in  what  is  in- 
cluded under  land  as  a  factor  in  production.  It  may  be  said  to 
include  all  the  materials  furnished  by  nature  for  man  to  work 
upon. 

While  man  and  nature  are  the  original  and  primary  factors 
in  the  problem  a  very  little  study  will  show  anyone  that  man 
would  not  accomplish  very  much  if  he  relied  solely  upon  his 
own  strength  and  did  not  make  use  of  tools  to  add  to  the  power 
and  effectiveness  of  his  efforts.  He  can  strike  a  harder  blow 
with  a  stone  held  in  the  hand  than  with  the  hand  alone,  making 
use  of  the  hardness  of  the  stone  and  the  momentum  which  goes 
with  its  weight.  When  he  fits  a  handle  to  the  stone  he  can 
strike  a  still  harder  blow.  When  the  stone  is  provided  with  a 
cutting  edge  it  becomes  still  more  effective  for  certain  purposes. 
By  making  use  of  such,  simple  mechanical  devices  as  the  lever 
and  the  inclined  plane  he  can  move  bodies  far  too  large  for  the 
meager  strength  of  his  unaided  muscles.  It  is  a  long  road  but 
a  fairly  direct  one  from  these  simple  beginnings  to  the  mighty 
engines  and  complicated  machines  of  the  present  day.  So  im- 
portant have  tools  become  in  the  economy  of  a  modern  nation 


158  PRINCIPLES  OF  NATIONAL  ECONOMY 

that  they  are  generally  treated  as  a  third  factor  of  production, 
along  with  man  and  nature.  While  man  and  nature  are  the 
original  and  primary  factors,  and  tools  the  derived  and  second- 
ary factors,  the  latter  have  become  in  spite  of  that  fact  almost 
as  important  as  either  of  the  original  factors. 

Labor.  In  economic  discussions  the  human  factor  is  usually 
named  labor,  but  it  must  be  remembered  that  labor  includes  the 
work  of  the  mind  as  well  as  of  the  body.  As  a  matter  of  fact, 
" labor"  was  originally  used  in  a  much  narrower  sense.  Manage- 
ment, or  direction,  was  assumed  to  be  the  real  thing,  and  dis- 
cussions of  the  problems  of  production  assumed  the  manager's 
point  of  view.  What  were  his  problems  ?  First,  of  course,  was 
the  problem  of  supplying  himself  with  the  three  factors  of  pro- 
duction,— labor,  land,  and  capital,  or  tools.  Since  tools  were 
purchasable,  a  supply  of  purchasing  power  was  all  that  was 
necessary  in  order  to  get  tools.  Hence  purchasing  power  came 
to  be  regarded  as  equivalent  to  capital.  With  a  supply  of  these 
three  factors — labor,  land,  and  capital — the  manager  was  pre- 
pared to  begin  the  work  of  organizing  a  productive  enterprise. 
He  needed  good  labor  as  well  as  good  land  and  good  tools.  An 
adequate  supply  of  labor,  land,  and  capital  of  good  quality  has 
generally  been  regarded,  therefore,  as  the  necessary  condition  in 
national  prosperity.  But  it  is  quite  as  important,  if  not  more 
important,  that  there  be  capable  management.  From  the  la- 
borer's point  of  view,  what  he  wants  is  more  and  better  managers 
to  hire  and  direct  him,  to  bid  against  one  another  for  his  labor, 
—not  more  and  better  laborers  to  compete  with  him.  This 
point  of  view  is  quite  as  important  as  that  of  the  manager,  who 
does  not  feel  the  need  of  more  and  better  managers  to  compete 
with  him,  but  rather  of  more  and  better  laborers  to  work 
under  his  direction. 

There  is,  however,  a  certain  historical  justification  for  the 
older  point  of  view,  which  regards  labor  as  a  factor  of  produc- 
tion to  be  used  and  directed  by  the  manager,  very  much  as  he 
would  use  other  factors  of  production.  A  skilled  mechanic, 
working  in  a  small  shop,  or  an  artist  in  his  studio  might  employ 


THE  INTERRELATION  OF  THE  FACTORS          159 

helpers  to  do  the  rough  work  which  did  not  require  much  skill. 
In  such  a  case  we  should  still  regard  the  thing  produced  as  the 
product  of  the  mechanic  or  the  artist  rather  than  of  his  helpers. 
In  a  larger  enterprise,  such  as  building  a  house,  the  man  who 
undertakes  to  assemble  the  materials  and  put  them  together 
according  to  plans  and  specifications  is  in  a  peculiar  sense  the 
builder  of  the  house.  Even  though  he  may  never  handle  a 
brick,  a  stone,  or  a  piece  of  timber,  the  workmen  are  still, 
in  a  sense,  his  helpers  and  not  the  real  builders.  As  we  pro- 
ceed, however,  from  these  simple  cases  to  more  and  more 
highly  complex  cases  the  employer's  function  becomes  more  and 
more  highly  specialized  until  it  is  easy  to  lose  sight  of  him  alto- 
gether and  to  begin  to  think  of  the  workmen  as  the  real  producers 
instead  of  mere  helpers,  and  of  the  employer  as  a  mere  profit 
taker  instead  of  the  real  producer.  Even  where  the  employer 
does  little  except  to  "get  business,"  he  is  obviously  a  most  im- 
portant factor  in  any  productive  enterprise,  and  sometimes  he 
seems  to  be  the  indispensable  factor, — the  man  who  could  not  be 
spared.  Where  he  is  the  life  of  the  enterprise,  and  any  other 
man  could  be  spared  without  great  harm,  he  will  probably  con- 
tinue to  regard  himself  as  the  real  producer  and  the  others  as 
his  helpers.  Under  such  conditions  he  will  probably  continue 
to  think  and  speak  of  the  desirability  (to  him)  of  having  an 
abundant  supply  of  labor,  rather  than  of  having  a  large  number 
of  "business  getters"  to  compete  with  him. 

There  are  several  reasons  why  it  might  be  better  to  continue 
using  the  terms  "man,"  "nature,"  and  "tools,"  as  we  have  done 
thus  far  in  this  chapter,  rather  than  "labor,"  "land,"  and  "capi- 
tal"; but  on  the  whole  it  is  probably  wiser  to  follow  the  custom 
of  writers  on  economics  and  use  the  latter  set  of  terms.  In  doing 
so,  however,  it  must  be  understood  that  labor  includes  all  effort 
put  forth  by  men,  whether  that  effort  be  physical  or  mental  or 
a  combination  of  both ;  that  land  includes  everything  which 
nature,  outside  of  man,  provides,  even  though  it  be  above  or 
below  the  surface  of  the  earth;  and  that  capital  includes  all 
joint  products  of  man  and  nature  which  are  used  not  for  direct 


160  PRINCIPLES  OF  NATIONAL  ECONOMY 

consumption  by  their  owners  but  for  the  purpose  of  aiding  the 
latter  in  getting  other  goods  which  they  may  consume  or  enjoy. 

Other  helps  to  national  prosperity.  National  prosperity  de- 
pends, to  be  sure,  upon  many  other  things,  such  as  organization, 
a  good  system  of  laws  which  encourage  rather  than  discourage 
production,  a  body  of  sound  and  wholesome  tradition,  and  a  sys- 
tem of  morals  under  which  all  vigorous  and  constructive  habits 
are  called  virtues  and  are  therefore  approved  and  encouraged, 
and  all  soft  and  enervating  habits  of  self-indulgence  are  called 
vices  and  are  therefore  disapproved  and  discouraged.  It  is  also 
important  that  there  be  a  virile  religion  which  shall  lend  an 
emotional  support  to  this  vigorous  type  of  morality, — which 
shall,  in  short,  create  an  emotional  interest  in  an  austere  and 
productive  life.  However,  these  three  factors, — labor,  land, 
and  capital, — as  we  have  denned  them,  are  the  elementary  fac- 
tors. They  are  the  raw  materials  out  of  which  national  pros- 
perity is  built. 

Since  labor  means  the  human  factor  in  production,  it  really 
includes  not  merely  the  wageworkers  but  all  kinds  and  classes 
of  human  beings  who  have  any  part  in  production.  It  is,  of 
course,  just  as  important  that  there  be  strong,  capable,  and  well- 
trained  men  as  that  there  be  productive  and  well-tilled  land  and 
good  tools,  machinery,  and  other  equipment.  It  is  not  enough 
that  the  people  be  capable  merely  in  a  general  way ;  it  is  neces- 
sary also  that  they  be  trained  in  many  specialized  forms  of 
skill.  These  specialized  forms  of  skill  must  naturally  be  the 
kinds  that  are  needed.  One  might  develop  remarkable  facility 
in  the  performance  of  a  certain  feat ;  but  if  no  one  needs  to 
have  it  performed,  it  is  of  no  advantage  either  to  the  performer 
or  the  community. 

This  means  that  it  is  necessary  to  increase  the  quantity  of 
those  special  forms  of  ability  which  seem  to  be  in  demand, — 
that  there  be  more  men  who  can  do  certain  important  things 
which  relatively  few  are  now  capable  of  doing.  In  our  com- 
plex civilization  it  is  not  likely  that  any  one  individual  or  one 
kind  of  skill  can  produce  the  whole  of  any  article.  It  usually 


THE  INTERRELATION  OF  THE  FACTORS          161 

takes  several  men,  each  one  doing  a  special  kind  of  work  requir- 
ing a  special  kind  of  skill,  to  produce  anything.  If  one  special 
kind  of  skill  is  lacking  the  other  workers  may  be  helpless.  Not 
many  years  ago  a  glass  manufacturer  was  planning  a  new 
branch  of  his  business,  in  which  a  new  product  was  to  be  pro- 
duced and  several  hundred  men  were  to  be  employed.  Brick 
and  mortar  and  all  building  materials,  as  well  as  tools  and 
machines,  could  easily  be  procured.  All  the  labor  necessary 
for  the  running  of  the  plant  was  available  except  one  special 
and  highly  scientific  expert.  He  could  not  be  found  in  the 
country.  As  a  consequence  the  new  branch  of  the  business 
could  not  be  started,  the  new  product  was  not  produced,  and 
employment  was  withheld  from  several  hundred  men.  It  was 
obviously  very  important  for  that  community  and  for  those 
laborers  that  they  should  have  a  larger  supply  of  that  special 
scientific  and  technical  ability.  One  man  trained  for  that  kind 
of  work  might  easily  have  been  worth  as  much  to  the  country 
as  a  hundred  additional  men  trained  for  a  kind  of  work  for 
which  there  were  thousands  of  others  already  trained. 

A  highly  efficient  system  of  education  should  have  antici- 
pated the  need  for  these  experts  and  should  have  trained  them. 
Given  a  race  of  high  average  natural  ability,  the  problem  of 
supplying  these  highly  specialized  experts  is  mainly  a  matter 
of  education.  The  probability  that  among  a  hundred  millions  of 
people  of  high  ability  a  few  could  be  found  with  the  capacity 
for  the  special  training  needed  is  so  great  as  to  amount  to  a 
certainty,  but  it  is  the  task  of  the  educational  system  to  dis- 
cover these  persons  and  then  to  give  them  the  necessary  train- 
ing. The  nation  with  such  an  educational  system  as  this, 
together  with  a  population  of  high  natural  ability,  is  not  likely  to 
be  beaten  in  economic  competition.  By  far  the  most  valuable 
resource  of  a  nation  is  its  fund  of  human  energy,  which  means 
its  people.  If  this  resource  is  rich  to  begin  with,  and  if  it  is 
thoroughly  developed  by  a  sound  and  efficient  educational  sys- 
tem, the  nation  has  the  first  and  most  important  essential  of 
greatness.  Nations  have  grown  rich  and  powerful  in  the  midst 


1 62  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  rather  poor  natural  conditions,  by  reason  of  the  fact  that 
they  have  developed  their  human  resources.  Other  nations  have 
grown  poor  and  weak  in  the  midst  of  rich  natural  surroundings 
by  reason  of  the  fact  that  they  have  wasted  or  failed  to  develop 
the  productive  capabilities  of  their  people. 

Land.  Rich  natural  resources  are,  however,  very  important ; 
that  is  to  say,  a  nation  which  develops  its  human  resources 
properly  can  prosper  more  if  it  possesses  a  rich  territory  than 
if  it  possesses  a  poor  territory.  That  is  so  obvious  as  to  need 
very  little  discussion.  It  is  very  much  like  saying  that  though 
a  good  farmer  may  manage  to  prosper  on  rather  poor  land, 
nevertheless  he  would  prosper  more  on  good  land.  This  brings 
us  to  the  consideration  of  the  other  original  and  primary  factor 
of  production,  namely,  land.  The  productive  power  of  land  is 
not  simply  a  matter  of  acres,  any  more  than  the  productive 
power  of  labor  is  a  matter  of  numbers.  Quality  is  as  important 
as  area,  though  area  is  very  important.  Area  is  important  in 
agriculture  because  it  takes  area  to  catch  the  sun's  rays  and  the 
rainfall,  without  which  plants  cannot  grow.  It  also  requires 
area  to  give  standing  room  to  plants.  But  with  all  these  advan- 
tages which  go  with  area,  if  there  be  no  soil  or  no  plant  food  in 
the  soil  there  can  be  no  production. 

The  productive  power  of  the  soil  itself  depends  partly  upon 
its  physical  and  partly  upon  its  chemical  condition.  A  good 
physical  condition  depends  upon  freedom  from  stones  and  other 
obstructions  which  interfere  with  tillage  and  the  use  of  ma- 
chines, a  good  subsoil  which  permits  excess  water  to  percolate 
downward  in  time  of  heavy  rainfall  and  then  to  rise  to  the  sur- 
face in  times  of  drought,  sufficient  porosity  to  permit  the  roots 
of  plants  to  penetrate  easily,  sufficient  firmness  to  lend  support 
to  the  plants,  and  so  on.  A  good  chemical  condition  depends, 
first,  upon  the  absence  of  injurious  acids  and  alkalis  in  danger- 
ous quantities  and,  second,  upon  the  presence  of  the  elements 
of  plant  food  in  sufficient  quantities  and  in  proper  proportions. 
Plants,  like  animals  and  human  beings,  need  a  balanced  ration. 
There  are  many  of  these  food  elements,  but  those  which  are 


THE  INTERRELATION  OF  THE  FACTORS          163 

most  likely  to  be  absent  or  insufficient  are  nitrogen,  phosphorus, 
and  potassium.  Generally  speaking,  any  soil  which  possesses 
these  three  elements  in  the  proper  proportion  may  be  said  to  be 
good  soil,  so  far  as  plant  food  is  concerned.  The  other  neces- 
sary elements  are  so  universally  abundant  as  to  furnish  the 
average  farmer  no  occasion  for  worry  or  even  forethought. 
Only  the  limiting  factors  of  production  are  considered  to  be  of 
any  economic  importance.  Hence  only  those  which  are  likely 
to  be  scarce  and  to  limit  production  are  called  economic  factors. 

Mineral  lands.  Mineral  lands  differ  so  fundamentally  from 
farm  lands  as  to  be  almost  in  a  class  by  themselves.  While  farm 
land  is  so  widely  distributed  as  to  give  almost  every  section  of 
the  earth's  surface  some  opportunity  for  a  profitable  agricul- 
ture, and  while  no  section  can  become  fabulously  rich  in  farm 
products,  minerals  are  so  localized  as  to  leave  large  areas  of 
habitable  territory  with  practically  no  mineral  resources  what- 
ever, while  very  small  districts  are  sometimes  so  rich  as  scarcely 
to  furnish  building  space  for  the  dwellings  of  the  people  who 
live  by  working  the  mines.  Coal  and  iron  are  not  only  the  most 
valuable,  in  the  aggregate,  of  all  the  minerals  but  they  have 
done  more  to  give  the  peculiar  character  to  our  present  indus- 
trial civilization  than  have  any  other  two  factors.  This  is 
sometimes  called  the  Age  of  Steel ;  but  without  coal  to  furnish 
a  cheap  and  abundant  fuel  and  without  the  rich  beds  of  iron 
ore,  some  of  which  can  be  worked  with  a  steam  shovel,  steel 
could  not  have  become  so  abundant  and  such  a  dominant  factor 
in  this  industrial  age. 

Capital.  Capital  takes  on  such  a  multiplicity  of  forms  as 
to  make  it  impossible  to  describe  it  beyond  saying  that  it  is 
made  up  of  all  goods,  except  land,  which  are  used  to  get  an  in- 
come. They  are  distinguished  from  things  which  are  used 
directly  for  personal  gratification.  Thus,  all  tools  and  machin- 
ery, stores,  factories,  shops,  barns,  fences,  and  raw  materials  not 
yet  worked  up  into  consumable  form  are  capital.  Dwelling 
houses  occupied  by  their  owners,  food  in  the  larders  of  con- 
sumers, clothes  which  are  in  the  closets  as  well  as  those 


1 64  PRINCIPLES  OF  NATIONAL  ECONOMY 

actually  being  worn,  books,  pictures^  household  furniture,  etc. 
are  consumers'  goods.  The  dividing  line  between  producers' 
goods  and  consumers'  goods  is  sometimes  a  rather  dim  and  wa- 
vering one,  but  that  need  not  disturb  us  much.  The  same  may 
be  said  regarding  the  line  which  separates  the  animal  from  the 
vegetable  kingdom,  and  yet  we  are  never  puzzled  as  to  which 
of  the  two  kingdoms  may  claim  any  one  of  our  common  plants 
or  animals.  The  physician's  automobile  may  be  at  one  time  a 
tool  of  his  profession  and  therefore  capital,  and  at  another 
time  a  pleasure  vehicle  and  therefore  a  consumer's  good.  Many 
other  objects  may  be  so  close  to  the  dividing  line  as  to  puzzle 
us  at  times,  but  the  great  mass  of  the  objects  with  which  we 
are  concerned  is  easily  classified. 

Capital,  like  consumers'  goods,  comes  into  existence  through 
the  application  of  labor,  ingenuity,  and  forethought  to  natural 
objects.  But  there  is  one  thing  which  enters  into  the  pro- 
duction of  a  piece  of  capital  which  does  not  enter  to  the  same 
degree  into  the  production  of  a  consumer's  good ;  that  is, 
waiting,  or  abstinence.  If  you  labor  to  make  a  tool  for  your 
own  use  you  do  not  reap  the  reward  of  your  labor  until  the  tool 
has  been  completed  and  has  been  used  for  a  time  in  adding  to 
your  production.  You  have  postponed  your  consumption.  If 
you  sell  the  tool  to  someone  else  you  may  at  once  spend  the 
money  you  receive  for  it  and  avoid  waiting.  But  the  one  who 
bought  it  of  you  now  has  to  wait,  since  he  has  given  up  the 
opportunity  to  spend  the  money  for  consumers'  goods  and  must 
now  abstain  until  the  tool  begins  to  bring  him  in  an  income. 

When  production  exceeds  consumption  capital  is  increased. 
From  the  foregoing  it  will  appear  that  the  accumulation  of 
capital  depends  in  a  very  direct  manner  upon  the  character 
of  the  people.  Unless  the  nation  consumes  less  than  it  pro- 
duces, it  is  impossible  that  capital  should  increase  at  all.  Even 
if  accumulation  should  take  the  form  of  saving  money,  it 
would  still  be  necessary  for  all  the  people  to  live  on  the  con- 
sumers' goods  produced  by  a  part  of  them,  in  order  that  the 
rest  of  them  might  devote  their  time  to  the  making  of  tools 


THE  INTERRELATION  OF  THE  FACTORS          165 

and  other  producers'  goods.  That  would  be  necessary  even 
in  a  communistic  society.  In  our  present  economic  system  any 
individual  who  can  live  on  less  than  his  income  may  spend  the 
balance  of  it  on  tools  and  other  producers'  goods.  That  which 
he  spends  for  consumers'  goods  virtually  hires  men  to  produce 
that  class  of  goods,  while  that  which  he  spends  for  producers' 
goods  virtually  hires  men  to  produce  that  class  of  goods.  The 
more  money  there  is  spent  for  producers'  goods,  the  more 
rapidly  they  will  accumulate.  This  means  that  the  more 
thrifty  the  people  are,  and  the  more  inclined  they  are  to  live 
on  less  than  their  incomes  and  to  spend  the  remainder  for  tools, 
the  better  equipped  with  tools  they  will  be. 

We  now  see  how  definitely  the  prosperity,  power,  and  great- 
ness of  a  nation  depend  upon  the  three  factors — labor,  land,  and 
capital.  A  nation  whose  people  are  possessed  of  high  ability 
(especially  for  those  fields  of  work  where  ability  is  most 
needed),  which  has  an  abundance  of  rich  land,  and  which 
accumulates  capital  rapidly  so  as  to  supply  itself  with  the  best 
of  tools  and  other  equipment  has  all  that  is  needed  on  the 
physical  side  to  make  it  prosperous.  But  much  remains  to  be 
said  in  detail  about  each  of  these  factors  and  the  ways  in  which 
they  are  to  be  combined. 


CHAPTER  X 

ECONOMIZING  LABOR 

BY  THE  DIVISION  OF  LABOR 

As  suggested  in  Chapter  IX,  labor,  land,  and  capital  are  the 
elements  out  of  which  national  prosperity  is  built.  Of  these  by 
far  the  most  important,  in  the  aggregate,  is  labor,  since  we 
include  under  that  term  both  mental  and  physical  exertion,  the 
labor  of  management,  of  direction,  and  of  investment  as  well  as 
manual  skill  and  muscular  strength.  It  was  also  stated  that  the 
efficiency  of  labor  depends  upon  two  factors:  the  natural 
ability  of  the  people  and  their  training.  But  there  are  many 
things  involved  in  training  which  are  not  taught  in  schools  or 
learned  in  shops  or  business  houses.  The  general  attitude  of 
mind  of  the  whole  people,  their  outlook  on  life,  their  personal 
habits,  their  systems  of  morals,  and  even  their  religion,  all 
have  their  share  in  the  efficiency  of  the  people.  The  efficiency 
of  labor  depends  also,  to  a  large  degree,  upon  its  organization 
and  the  opportunity  for  specialization. 

Adam  Smith  begins  his  great  "  Inquiry  into  the  Nature  and 
Causes  of  the  Wealth  of  Nations"  with  a  discussion  of  the 
division  of  labor.  Other  writers,  both  ancient  and  modern, 
had  commented  on  the  great  fact  of  interdependence  of 
individuals  in  society,  but  no  one  had  gone  into  such  detail  or 
shown  so  clearly  just  why  a  minute  division  of  labor  was  so 
advantageous.  His  statement  of  the  case  has  scarcely  been 
improved  upon  up  to  the  present  day,  though  many  of  his 
illustrations  are  out  of  date. 

Meaning  of  the  division  of  labor.  By  a  division  of  labor  he 
means,  first,  a  system  under  which  no  one  produces  everything 
he  needs,  but  each  one  confines  himself  to  the  production  of 

1 66 


ECONOMIZING  LABOR  167 

that  one  thing  or  those  few  things  for  the  production  of  which 
he  is  best  fitted,  exchanging  his  surplus  product  for  the  surplus 
products  of  others  who  are  specializing  on  other  things ;  second, 
the  process  of  dividing  the  work  involved  in  the  making  of 
a  given  article  (each  man  performing  a  single  part)  and  then 
assembling  all  the  parts,  thus  producing  a  complete  whole.  He 
mentions  the  nail-makers  of  his  day  as  illustrations  of  the  first 
form.  A  common  blacksmith,  having  many  other  kinds  of  work 
to  do,  could  never  become  very  skillful  at  nail-making,  but  one 
who  did  nothing  else  except  to  make  nails  became  very  skillful 
and  could  make  in  the  course  of  a  day  several  times  as  many  as 
a  common  blacksmith.  He  mentions  boys  under  twenty  who 
had  never  learned  any  other  trade  and  who  could  make,  each  of 
them,  upwards  of  two  thousand  three  hundred  nails  in  a  day ; 
whereas  a  common  smith,  even  though  he  were  accustomed  to 
making  nails  occasionally,  could  seldom  make  over  eight  hun- 
dred or  a  thousand  in  a  day.  The  second  form  of  the  division  of 
labor  was  found  in  his  day  in  the  making  of  pins.  The  work  of 
making  a  pin  was  divided  into  eighteen  different  operations, 
each  operation  being  performed  by  a  different  workman.  Of 
course  neither  nails  nor  pins  are  made  nowadays  as  they  were 
in  his  day,  but  the  division  of  labor  has  been  carried  even 
farther.  They  are  turned  out  by  automatic  machines,  but  the 
machines  are  made  by  one  set  of  men,  and  the  metal  is  mined, 
smelted,  and  prepared  by  different  groups ;  all  are  performing 
parts  of  the  work  of  making  nails  or  pins,  as  the  case  may  be. 
Thousands  of  other  illustrations  may  be  found  all  about  us  if  we 
choose  to  look  for  them. 

Advantages.  Adam  Smith  names  three  distinct  advantages 
which  result  from  the  division  of  labor : 

First,  the  improvement  in  the  dexterity  of  the  workman  neces- 
sarily increases  the  quality  of  the  work  he  can  perform ;  and  the 
division  of  labor,  by  reducing  every  man's  business  to  some  one 
simple  operation,  and  by  making  this  operation  the  sole  employment 
of  his  life,  necessarily  increases  very  much  the  dexterity  of  the 
workman.  .  .  .  Secondly,  the  advantage  which  is  gained  by  saving 


1 68  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  time  commonly  lost  in  passing  from  one  sort  of  work  to  another, 
is  much  greater  than  we  should  at  first  view  be  apt  to  imagine  it. 
It  is  impossible  to  pass  very  quickly  from  one  kind  of  work  to 
another  that  is  carried  on  in  a  different  place  and  with  quite  different 
tools.  .  .  .  Thirdly  and  lastly,  everybody  must  be  sensible  how 
much  labor  is  facilitated  and  abridged  by  the  application  of  proper 
machinery.  It  is  unnecessary  to  give  any  example.  I  shall  only 
observe,  therefore,  that  the  invention  of  all  those  machines  by  which 
labor  is  so  much  facilitated  and  abridged,  seems  to  have  been 
originally  owing  to  the  division  of  labor.  Men  are  much  more  likely 
to  discover  easier  and  readier  methods  of  attaining  any  object, 
when  the  whole  attention  of  their  minds  is  directed  towards  that 
single  object,  than  when  it  is  dissipated  among  a  great  variety  of 
things.  But,  in  consequence  of  the  division  of  labor,  the  whole  of 
every  man's  attention  comes  naturally  to  be  directed  towards  some 
one  very  simple  object.  It  is  naturally  to  be  expected,  therefore,  that 
some  one  or  other  of  those  who  are  employed  in  each  particular 
branch  of  labor  should  soon  find  out  easier  and  readier  methods  of 
performing  their  own  particular  work,  wherever  the  nature  of  it 
admits  of  such  improvement.  A  great  part  of  the  machines  made 
use  of  in  those  manufactures  in  which  labor  is  most  subdivided, 
were  originally  the  inventions  of  common  workmen.1 

Adam  Smith's  opinion  that  the  third  and  last  of  these  advan- 
tages was  of  special  importance  has  been  fully  justified  by 
subsequent  experience.  Those  special  phases  of  the  division  of 
labor  which  he  so  aptly  illustrated  by  the  nail-makers  and  the 
pin-makers  of  his  day  scarcely  exist  now  except  in  some  minor 
industries.  The  nail-makers  and  pin-makers  actually  made 
their  products  with  their  own  hands,  using  only  such  tools  as 
could  be  handled  and  driven  by  their  own  muscles.  Machines 
have  now  taken  the  place  of  the  simple  tools  of  that  day. 
Sometimes  these  machines  are  directed  and  fed  by  attendant 
laborers,  but  sometimes  they  are  so  perfected  as  to  require  very 
little  attention,  feeding  themselves  automatically  and  stopping 
automatically  when  anything  goes  wrong.  In  these  cases  the 
work  of  the  attendant  is  reduced  to  a  minimum,  consisting 

1  Wealth  of  Nations,  chap.  i. 


ECONOMIZING  LABOR  169 

merely  in  starting  the  machines  and  putting  them  in  order  when 
anything  goes  wrong. 

There  are  penalties,  however,  to  be  paid  for  the  extreme  divi- 
sion of  labor  to  which  we  have  become  accustomed.  It  is  un- 
doubtedly efficient  and  economical — without  it  many  articles 
which  are  now  enjoyed  by  great  masses  of  people  v/ould  be  so 
scarce  as  to  be  available  only  for  the  very  few — but  it  puts  a 
great  strain  upon  those  who  specialize.  The  ability  to  give 
close  attention  to  one  thing  for  a  long  time  is  not  very  widely 
distributed.  Only  the  superior  races  possess  it ;  and  even  within 
these  races  there  are  many  individuals  who  lack  it,  especially  in 
their  early  youth.  They  easily  become  discontented  and  rest- 
less if  required  to  work  under  conditions  of  extreme  specializa- 
tion. They  would  be  much  better  satisfied  with  more  desultory 
work,  even  though  such  work  accomplished  less.  This  is  one  of 
the  reasons  why  the  quality  of  the  population  is  such  an  impor- 
tant factor  in  national  prosperity.  A  nation  whose  workers 
cannot  stand  specialized  work  will  easily  be  left  behind  by  a 
superior  nation  whose  workers  can. 

Differences  between  a  tool  and  a  machine.  The  difference 
between  a  tool  and  a  machine  is  fairly  clear.  The  working  part 
of  a  tool  is  not  only  driven  but  guided  by  human  muscles.  A 
machine  may  be  driven  by  human  muscles,  but  the  working 
part  is  guided  by  the  machine  itself.  Besides,  the  power  is  not 
applied  directly  to  the  working  parts,  but  indirectly  through  a 
series  of  mechanical  devices  such  as  wheels,  pulleys,  levers, 
cranks,  etc.  For  example,  the  working  parts  of  a  sewing  ma- 
chine are  the  needle  and  the  bobbin.  These  are  guided  by  the 
other  parts  of  the  machine,  and  the  power  is  applied  indirectly. 
It  is,  therefore,  a  machine,  even  though  it  is  propelled  by  the 
muscles  of  the  operator;  on  the  other  hand,  the  needle  of 
the  tailor  or  seamstress  is  not  only  propelled  but  guided  by  the 
worker.  The  hammer  of  the  blacksmith  is  a  tool ;  a  steam  ham- 
mer is  a  machine,  not  so  much  because  it  is  driven  by  steam  as 
because  the  working  part  (that  is,  the  hammer  itself)  is  con- 
trolled, guided,  and  made  to  strike  accurately  by  other  parts 


170  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  the  machine,  and  the  power  is  applied  indirectly  through 
mechanical  devices.  Even  in  the  case  of  a  riveting  machine, 
while  it  has  to  be  held  in  place,  the  actual  blows  are  struck  in 
rapid  succession  by  a  striking  part  which  repeats  the  same 
motion  over  and  over,  being  guided  in  its  rapid  motion  by  other 
parts  which  are  made  for  that  purpose. 

Advantages  of  machinery.  The  advantages  of  the  machine 
over  the  tool  are,  first,  that  it  makes  possible  the  use  of  greater 
power  than  can  be  used  to  drive  a  tool ;  second,  that  it  can  be 
driven  at  much  greater  speed.  Since  the  working  part  is  guided 
accurately  by  the  mechanism  and  made  to  repeat  the  same 
operations  over  and  over,  the  only  limit  of  the  speed  at  which 
it  can  be  driven  is  that  fixed  by  the  strength  of  the  materials 
of  which  it  is  composed.  A  third  advantage  is  that  by  reason  of 
the  power  which  may  be  used  to  drive  it,  and  of  -the  strength 
of  the  materials  of  which  it  is  composed,  it  can  perform  opera- 
tions which  no  tool  whose  working  part  is  guided  and  controlled 
by  human  muscles  could  perform.  Perhaps  it  would  be  more 
accurate  to  say  that  it  can  be  made  to  control  working  parts 
which  are  themselves  too  large  and  heavy  to  be  guided  by 
human  muscles.  The  working  part  of  a  steel-rolling  mill,  for 
example,  consists  of  the  rollers.  Obviously  no  human  hand 
could  guide  such  powerful  instruments,  to  say  nothing  about 
driving  them.  They  are  held  in  place  and  controlled  by  a  power- 
ful framework  and,  with  the  stupendous  power  which  they  have 
behind  them,  can  perform  gigantic  feats.  The  fact  that  a  ma- 
chine is  capable  only  of  repeating  one  operation  over  and  over 
suggests  a  weakness.  It  can  be  successfully  employed  only 
where  there  are  operations  which  have  to  be  repeated  a  great 
many  times.  The  fact  that  sewing  involves  the  making  of  many 
stitches,  all  of  them  very  much  alike,  makes  it  a  suitable  kind 
of  work  for  a  machine.  The  binding  of  sheaves  of  grain  is  an- 
other operation  which  has  to  be  repeated  a  vast  number  of  times 
in  the  harvesting  of  a  crop ;  therefore  a  twine  binder  is  a  practi- 
cal machine.  Threshing  the  grain  with  a  flail  also  required  a 
constant  repetition  of  the  same  act ;  therefore  it  could  be  per- 


ECONOMIZING  LABOR  171 

formed  by  a  machine.  In  short,  any  operation  which  has  to  be 
repeated  without  variation  a  great  number  of  times  is  suitable 
for  machine  work. 

Human  ingenuity  is  now  able  to  construct  machines  which 
can  perform  any  operation,  however  delicate,  which  the  human 
hand  can  perform.  Anyone  who  has  seen  the  wonderful  machin- 
ery at  work  in  a  modern  watch  factory,  for  example,  will  not 
doubt  this  statement.  But  if  it  is  an  operation  which  does  not 
have  to  be  repeated  continuously  and  a  great  number  of  times, 
it  may  not  pay  to  build  a  machine  for  the  purpose.  It  may  be 
cheaper  to  do  the  work  by  hand.  Even  the  darning  of  socks 
and  the  patching  of  trousers  can  be  done  by  machinery ;  but  un- 
less it  were  done  on  such  a  large  scale  as  to  keep  a  darning- 
machine  or  a  patching-machine  busy  a  good  part  of  the  time  it 
would  be  cheaper  to  darn  and  patch  by  hand.  There  are  still 
a  good  many  operations  of  this  character,  especially  in  the 
household  and  also  in  agriculture,  the  greatest  of  all  our  indus- 
tries. Much  work  must  still  be  done  by  hand  or  with  tools 
rather  than  with  machines. 

Avoid  competing  with  machines.  By  way  of  digression  it  may 
be  pointed  out  that  young  people  who  are  looking  forward  to 
an  occupation  should  bear  in  mind  that  a  machine  can  do  any- 
thing which  can  be  reduced  to  a  routine,  or  a  constant  repetition 
of  the  same  act,  and  that  in  the  course  of  time  all  such  work 
will  probably  be  done  by  machines ;  therefore  any  occupation 
requiring  constant  repetition  ought  to  be  avoided  by  everyone 
who  is  intelligent  enough  to  be  trained  for  anything  else.  No 
machine  can  think  or  use  discretion ;  therefore  it  will  never  be 
able  to  do  any  kind  of  mental  work  or  any  kind  of  physical 
work  which  requires  judgment,  discretion,  taste,  or  tact.  Those 
who  do  not  wish  to  compete  with  machines  will  do  well  to  train 
themselves  to  think,  to  use  discretion,  or  to  exercise  taste  or  tact. 
One  should  do  this  as  much  in  the  interest  of  the  nation  as  in 
the  interest  of  oneself.  The  nation  has  no  great  need  for  men 
to  do  work  which  machines  can  do  just  as  well.  What  it  needs  is 
men  who  can  do  what  machines  can  never  do. 


172  PRINCIPLES  OF  NATIONAL  ECONOMY 

Two  kinds  of  division  of  labor.  As  suggested  above,  the  divi- 
sion of  labor  takes  on  a  somewhat  different  character  when 
highly  developed  machinery  comes  into  general  use.  This  may 
be  explained  further  by  pointing  out  two  kinds  of  division.  One 
has  been  called  the  contemporaneous  division  of  labor  and  the 
other,  the  successive  division  of  labor.1  Under  the  contem- 
poraneous division  of  labor  men  are,  at  the  same  time,  specializ- 
ing in  different  lines  of  production.  One  group  is  producing,  let 
us  say,  breadstuffs  and  bread,  another  meat,  another  textile 
fabrics  and  clothes,  and  so  on,  each  group  bringing  some  kind 
of  raw  material  through  the  various  stages  of  production  until  it 
matures  into  a  finished  product  ready  for  consumption.  An- 
other phase  of  the  contemporaneous  division  is  found  when  dif- 
ferent men  are,  at  the  same  time,  producing  different  parts  of 
the  same  product,  the  parts  being  assembled  later  into  a  finished 
whole.  Lumbermen  are  cutting  the  timber  which  eventually 
goes  into  a  house,  while  men  in  the  ore  beds  are  getting  out  the 
iron  ore  which  eventually  goes  into  the  house  in  the  form  of 
nails,  and  still  other  workmen  are  making  the  brick  or  quarry- 
ing the  stone  which  eventually  will  go  into  the  foundations  and 
the  chimneys. 

Under  the  successive  division  of  labor  different  sets  of  men 
are  working  on  the  same  material,  bringing  it  forward  through 
the  successive  stages  to  maturity.  Thus,  following  the  choppers 
who  fell  the  trees  come  the  sawyers  who  saw  them  into  rough 
boards,  the  carriers  who  transport  the  boards,  the  men  in  the 
planing  mill  who  plane  them,  and  so  on,  until  the  carpenters 
fit  them  into  their  places  in  the  house.  The  iron  ore  goes 
through  similar  stages,  as  does  every  bit  of  material  which 
enters  into  the  final  product. 

The  lengthening  of  the  process.  This  lengthening  of  the 
process  of  production,  making  it  extend  over  a  longer  period 
of  time,  is  one  of  the  most  striking  characteristics  of  the  era 
of  machine  production.  It  calls  for  more  foresight,  more  plan- 
ning for  the  distant  future,  more  expenditure  of  labor  and  in- 

iSee  Taussig,  Wages  and  Capital,  p.  6.    New  York,  1898. 


ECONOMIZING  LABOR  173 

vesting  of  capital  long  in  advance  of  the  consumption  of  goods, 
than  were  ever  necessary  or  possible  in  any  previous  age. 
There  is,  therefore,  under  this  regime,  a  greater  demand  than 
ever  before  for  foresight,  for  thrift,  for  courageous  investment, 
for  the  hazarding  of  large  sums  on  the  chance  of  gains  in  the 
distant  future.  There  may  be  some  connection  between  this 
fact  and  the  fact  that  the  large  rewards,  in  our  day,  go  to  the 
men  who  exercise  foresight,  who  invest  courageously  and  wisely, 
who  hazard  their  time  and  wealth  on  enterprises  which  can  bear 
fruit  only  at  some  distant  day  in  the  future ;  but  to  do  these 
things  successfully  and  safely  requires  great  wisdom.  Some, 
however,  lacking  wisdom,  may  blunder  into  success  ;  but  those 
who  blunder  are  much  more  likely  to  blunder  into  failure, 

The  contemporaneous  division  of  labor  has  to  do  with  space ; 
that  is,  it  involves  the  doing  of  different  kinds  of  work  in  dif- 
ferent places  at  the  same  time.  This  calls  for  the  coordination 
of  that  labor  and  the  exchange  of  products  in  order  that  each 
specialist  or  specialized  group  may  get  the  advantage  not  only 
of  its  own  efficiency  but  of  that  of  other  specialists  and  special- 
ized groups.  Where  different  workers  are,  at  the  same  time, 
but  in  different  places,  working  on  different  parts  of  the  same 
product,  it  is  necessary  that  someone  should  coordinate  the 
work.  In  a  great  automobile  factory,  for  example,  there  are 
many  different  parts  being  produced  simultaneously.  In  order 
that  these  parts  may  all  be  assembled  and  fitted  together 
there  must  be  very  careful  planning  and  organization.  This 
is  what  is  meant  by  the  coordination  of  labor  performed  in 
different  places. 

The  time  element.  The  successive  division  of  labor  has  to 
do  with  time ;  that  is,  it  involves  doing,  at  different  times,  by 
different  men,  different  parts  of  the  work  of  completing  an 
article.  In  the  same  automobile  factory  the  same  piece  of 
material  is  worked  upon  by  many  men  in  a  regular  order  of 
succession.  This  calls  for  the  coordination  of  labor  performed 
at  different  times.  The  lengthening  of  the  process  of  production 
in  the  whole  of  modern  society  makes  this  form  of  coordination 


174  PRINCIPLES  OF  NATIONAL  ECONOMY 

peculiarly  important.  Its  greatest  importance,  however,  is 
found  outside  any  individual  factory.  Before  the  automobile 
factory  could  be  built  there  must  have  been  much  work  done  in 
procuring  the  raw  materials  for  the  building  and  the  machines, 
in  producing  food  and  clothing  for  laborers,,  and  in  doing  a 
multitude  of  other  things.  Similarly,  before  shoes  can  be  made, 
cattle  must  be  raised  and  slaughtered,  and  their  hides  tanned ; 
shoe  factories  must  be  erected  and  equipped  with  products  from 
the  mines  and  forests ;  and  a  vast  amount  of  preparation  must 
be  made  in  other  ways.  The  labor  of  the  herdsman  must  be 
coordinated  with  that  of  the  clerk  in  the  shoe  store ;  otherwise 
we  should  not  have  shoes  as  we  now  have  them.  Unless  this 
coordination  is  brought  about,  the  same  man  would  have  to  kill 
the  animal,  skin  it,  tan  the  hide,  and  go  through  all  the  proc- 
esses necessary  to  the  finishing  of  a  pair  of  shoes. 

Territorial  division  of  labor.  In  one  of  its  broader  aspects 
the  contemporaneous  division  of  labor  is  known  as  the  terri- 
torial division  of  labor.  This  is  what  takes  place  when  one  re- 
gion produces  that  for  which  it  is  best  fitted  and  exchanges  its 
surplus  for  the  surplus  of  other  regions  which  also  are  special- 
izing on  those  products  for  which  they  are  best  fitted.  Thus, 
our  Middle-Western  states  of  the  upper  Mississippi  Valley  pro- 
duce hay,  grain,  and  live  stock  to  supply  bread,  meat,  and  dairy 
products  not  only  for  themselves  but  for  the  rest  of  the  coun- 
try as  well,  besides  sending  a  great  deal  abroad.  The  South 
grows  cotton  enough  to  supply  the  greater  part  of  the  world. 
Both  regions  receive  in  exchange  for  these  farm  products  the 
manufactured  products  of  the  Eastern  states  and  foreign  coun- 
tries, and  the  mineral  products  of  the  mountain  states  and  the 
upper  regions  of  the  Great  Lakes. 

It  is  the  territorial  division  of  labor  which  gives  rise  to  the 
important  business  of  transporting  goods  from  one  region  to  an- 
other. Obviously,  if  one  region  should  find  it  advantageous  to 
produce  everything  needed  or  desired  by  its  inhabitants,  there 
would  be  no  occasion  for  transporting  goods  into  it.  Similarly, 


ECONOMIZING  LABOR  175 

if  it  did  not  produce  a  surplus  of  something  or  other  which  could 
be  sold  on  an  outside  market,  there  would  be  no  occasion  for 
transporting  goods  outward.  At  the  same  time,  the  territorial 
division  of  labor  is  made  possible  by  the  transportation  of  goods 
and  tends  to  grow  in  importance  in  proportion  as  transportation 
becomes  cheaper  and  more  efficient.  A  slight  advantage  in  the 
exchange  of  products  might  easily  be  overcome  by  a  heavy 
transportation  cost.  For  example,  even  though  New  England 
cannot  grow  wheat  so  economically  as  Kansas  or  North  Dakota 
can,  yet  if  the  cost  of  transporting  it  over  the  intervening  dis- 
tance and  of  transporting  manufactured  products  back  to  pay 
for  it  were  very  high,  New  England  might  find  it  advantageous 
to  grow  her  own  wheat,  and  the  states  which  now  produce  it 
might  find  it  advantageous  to  do  their  own  manufacturing. 

The  advantages  of  a  territorial  division  of  labor,  where  the 
transportation  problem  is  solved,  are  similar  to  those  which 
result  from  a  division  of  labor  among  individuals  in  the  same 
neighborhood.  If  it  is  profitable  for  each  individual  to  specialize 
upon  the  work  for  which  he  is  best  fitted,  it  is  equally  profitable 
for  each  neighborhood  to  specialize.  In  almost  any  neighbor- 
hood, however,  there  is  some  diversity  of  soil  and  natural  re- 
sources, as  well  as  a  diversity  of  talents  among  the  people. 
Therefore  it  will  seldom  happen  that  a  whole  neighborhood, 
much  less  a  whole  region  of  considerable  size,  can  profitably 
specialize  upon  a  single  product.  It  is  more  likely  that  a  whole 
neighborhood  or  region  will  find  it  profitable  to  specialize  upon 
a  number  of  products.  Thus,  New  England,  the  South,  and 
the  Corn  Belt  each  produces  a  considerable  variety  of  products, 
but  each  also  finds  it  advantageous  to  import  a  considerable 
variety  of  other  products.  New  England,  for  example,  probably 
secures  her  bread  and  meat  at  less  cost  to  herself  by  devoting 
most  of  her  energy  to  manufacturing,  and  then  exchanging  her 
manufactured  products  for  the  wheat  and  beef  of  the  West,  than 
she  would  if  she  tried  to  grow  these  important  food  products  on 
her  own  soil.  Let  us  suppose  that  the  labor  of  an  average  man 


176  PRINCIPLES  OF  NATIONAL  ECONOMY 

will  produce  in  a  year  eight  hundred  dollars'  worth  of  goods  in 
an  average  New  England  factory,  but  only  six  hundred  dollars' 
worth  of  wheat  on  an  average  New  England  farm.  Let  us  as- 
sume that  it  costs  twenty-five  dollars  to  ship  his  goods  west  and 
seventy-five  dollars  to  ship  the  wheat  east.  Let  us  assume, 
further,  that  in  the  wheat-growing  sections  of  the  West  the 
labor  of  an  average  man  will  produce  a  thousand  dollars'  worth 
of  wheat  and  only  eight  hundred  dollars'  worth  of  goods  in  a 
factory.  It  can  easily  be  figured,  so  long  as  the  conditions  re- 
main as  we  have  assumed  them  to  be,  that  the  wheat  section 
can  get  more  manufactured  products  for  its  labor  by  grow- 
ing wheat  than  by  manufacturing,  and  that  New  England 
can  get  more  wheat  for  her  labor  by  manufacturing  than  by 
growing  wheat. 

International  division  of  labor.  When  the  territories  consid- 
ered are  not  different  sections  of  the  same  country  but  different 
countries,  we  have  what  is  known  as  the  international  division 
of  labor.  Were  it  not  for  certain  uneconomic  factors  which 
enter  into  the  problems  of  national  life  and  existence,  everything 
which  can  be  said  in  favor  of  a  territorial  division  of  labor  and 
freedom  of  exchange  within  a  country  could  also  be  said,  and 
with  equal  force,  in  favor  of  an  international  division  of  labor. 
The  chief  of  these  uneconomic  factors  is  the  possibility  of  war. 
War  is  the  greatest  disturber  of  normal  economic  activities,  and 
until  it  can  be  eliminated  every  nation  must  calculate  with  refer- 
ence to  its  possibility  and  be  prepared  for  it.  In  case  of  war  a 
nation  which  is  not  prepared  to  produce  all  the  necessaries  of 
life,  as  well  as  all  military  supplies,  may  find  itself  helpless  be- 
fore a  foreign  enemy.  Its  only  other  hope  would  be  to  keep 
open  the  channels  of  commerce  which  connect  it  with  outside 
sources  of  supply,  but  this  is  one  of  the  things  which  the  enemy 
country  would  try  to  prevent.  Nitrates,  for  example,  are,  in 
the  present  state  of  science,  necessary  both  for  fertilizers  and 
for  explosives.  A  country  which  could  neither  produce  its  own 
nitrates  nor  manage  to  get  a  supply  from  abroad  could  not  wage 
war  for  a  very  long  time. 


ECONOMIZING  LABOR  177 

In  some  animal  societies,  and  especially  in  the  colonies  of 
certain  insects  such  as  bees  and  ants,  there  is  an  elaborate  and 
admirable  division  of  labor.  Elaborate  and  admirable  as  it  is, 
however,  it  is  rudimentary  as  compared  with  that  which  is 
found  in  any  highly  developed  industrial  society.  There  are  no 
such  minute  division  of  labor  and  extreme  specialization  as  are 
found  in  a  modern  factory ;  there  is  no  such  detailed  planning 
for  the  distant  future;  there  is  no  such  bringing  together  of 
materials  from  distant  places ;  there  is  no  such  coordination  of 
labor  performed  at  such  widely  separated  times  and  places ; 
there  is  no  such  system  of  exchange  as  we  see  carried  on  all 
about  us  in  our  own  communities.  If  you  will  study  the  various 
material  objects  on  your  dinner  table  and  find  out  all  about 
each  of  them,  you  will  find  that  literally  thousands  of  people, 
few  of  whom  you  ever  saw  or  heard  of,  and  few  of  whom  ever 
saw  or  heard  of  one  another,  have  had  a  part  in  the  preparation 
of  your  meal  and  the  table,  dishes,  knives,  forks,  and  spoons 
which  you  use.  It  is  through  the  system  which  we  have  called 
the  division  of  labor  that  you,  by  doing  a  very  few  useful  things 
and  doing  them  well,  find  a  considerable  variety  of  objects  on 
your  table  at  the  proper  time  without  your  having  given  much 
thought  to  any  one  of  them. 

No  preconceived  plan.  This  is  sometimes  called  the  organiza- 
tion of  industry.  The  term  " organization"  may  be  a  little 
misleading,  though  not  necessarily  so.  It  seems  to  imply  that 
somebody  thought  it  all  out  or  planned  it  and  then  organized 
the  system.  It  did  not  come  about  in  that  way.  The  process  was 
more  like  the  slow  growth  of  an  organism.  Each  individual 
looked  about  for  something  to  do  in  order  to  earn  a  living  and 
took  what  looked  to  him  at  the  time  like  the  most  available 
opportunity.  Wherever  there  was  a  scarcity  of  workers  there 
was  an  opportunity  for  a  new  worker.  Wherever  there  was  an 
oversupply  the  opportunity  did  not  look  so  good.  By  that  sim- 
ple process  in  which  each  individual  chose  to  do  that  which 
he  could  do  to  his  own  greatest  advantage  the  whole  elaborate 
system  was  worked  out. 


178  PRINCIPLES  OF  NATIONAL  ECONOMY 

Adam  Smith's  remarks,  quoted  earlier  in  this  chapter,  regard- 
ing the  way  in  which  the  minute  division  of  labor  has  aided  in 
the  invention  and  improvement  of  machinery,  may  be  applied 
to  the  much  greater  problem  of  the  development  and  improve- 
ment of  a  great  and  complex  industrial  system.  When  each 
workman  spends  all  his  time  performing  a  single  operation,  it 
is  much  easier  for  him  to  devise  a  better  way  of  doing  it  than 
it  would  be  if  he  had  to  give  his  attention  to  many  things.  It  is 
probable  that  no  important  and  complicated  machine  was  ever 
invented  and  made  to  work  successfully  without  a  great  deal  of 
trying  out,  modification,  and  general  improvement.  In  actual 
use  many  weaknesses  in  the  machine  are  revealed  which  no  in- 
ventor, however  wise,  could  have  foreseen  and  prevented.  What 
is  sometimes  called  the  heroic  theory  of  invention  does  not  actu- 
ally work  in  practice.  By  the  heroic  theory  is  meant  the  theory 
that  a  great  invention  springs,  a  completed  whole,  from  the 
mind  of  the  inventor,  as  Athena  sprang  full-armed  from  the 
head  of  Zeus.  The  fact  seem  to  be  that  no  human  mind  is 
capable  of  inventing  a  complete  and  successful  machine  without 
many  trials,  failures,  modifications,  and  detailed  and  piecemeal 
improvements.  Even  such  a  simple  device  as  a  bicycle  passed 
through  a  long  and  interesting  evolution  before  it  reached  a 
stage  which  made  it  generally  useful  and  popular.  The  automo- 
bile is  another  illustration  of  gradual  and  detailed  improvement 
after  it  was  actually  in  use. 

If  it  is  impossible  for  any  human  intelligence  to  invent  and 
construct  at  once  a  satisfactory  automobile,  it  would  have  been 
obviously  impossible  to  invent  and  organize  a  whole  indus- 
trial system;  that  would  present  an  infinitely  more  difficult 
problem  than  the  invention  and  construction  of  any  machine 
that  was  ever  built.  It  has  been  by  age-long  trial  and  error, 
variation  and  selection,  experiment  and  failure,  that  even  a 
tolerably  successful  industrial  system  has  been  worked  out. 
There  are  doubtless  endless  improvements  yet  to  be  made,  but 
they  certainly  will  be  made  by  the  same  process  of  gradual  and 
piecemeal  adjustment.  Anyone  who  thinks  that  he  can  devise 


ECONOMIZING  LABOR  179 

and  organize  a  better  system  than  the  present  shows,  by  the 
very  fact  that  he  thinks  so,  that  he  is  unfitted  for  the  task.  He 
shows  that  he  lacks  the  first  element  in  fitness;  namely,  a 
knowledge  of  the  vastness  of  the  problem  and  the  infinite  num- 
ber of  difficulties  to  be  overcome.  It  is  different,  however,  with 
one  who  thinks  of  some  detail  in  the  present  industrial  system 
which  might  be  improved.  This  presents  a  problem  worthy  of 
the  greatest  minds,  and  it  also  furnishes  a  possibility  of  genuine 
achievement. 


CHAPTER  XI 

ECONOMIZING  LABOR  (CONTINUED) 
BY  THE  USE  OF  POWER 

Power  needed  for  moving  material  objects.  It  has  been  pointed 
out  in  Chapter  IX  that  man's  work,  on  the  physical  side  at 
least,  consists  in  moving  material  objects.  For  this  work  the 
first  essential  is  power.  The  power  first  applied  was,  of  course, 
that  which  was  generated  in  his  own  body  and  exercised  through 
his  own  muscles.  But  the  secret  of  the  industrial  success  of 
modern  civilized  nations  lies  in  their  command  of  other  sources 
of  power  rather  than  in  any  superior  muscularity  of  their  own. 

Animal  power.  The  first  of  these  other  sources  of  power 
which  man  utilized  on  a  large  scale  was  that  of  animals  which 
he  domesticated  and  enslaved.  They  are  still  one  of  the  most 
important  sources,  if  not  the  most  important  source,  of  power. 
There  were  on  the  farms  of  the  United  States  in  1920  about 
26,000,000  horses  and  mules,  to  say  nothing  of  those  in  use  in  the 
cities  and  towns.  If  we  add  those  not  on  farms  it  brings  the 
number  nearly  to  30,000,000.  It  is  not  easy  to  compare  the 
actual  working  power  of  a  horse  with  that  of  the  horse-power 
unit  as  used  in  measuring  the  power  of  a  steam  engine ;  but, 
assuming  that  they  are  equal,  it  would  appear  that  the  total 
animal  power  in  use  in  the  United  States  was,  until  recently, 
very  nearly  as  great  as  the  total  steam  and  water  power  used 
in  manufacturing. 

Among  the  animals  which  have  furnished  power  for  man's 
work  may  be  named  the  horse,  the  mule,  the  ass,  the  ox,  the 
buffalo,  the  camel,  the  elephant,  the  reindeer,  the  llama,  the 
dog,  and  the  goat.  Of  these  the  most  important  for  the  north- 
temperate  zone  is  the  horse,  though  the  ox  is  a  close  second. 

1 80 


ECONOMIZING  LABOR  181 

Originally,  in  fact  until  very  modern  times,  the  horse  was  used 
mainly  to  carry  man  himself  or  loads  of  material  on  his  back 
rather  than  for  traction ;  that  is,  for  pulling  or  drawing  loads. 
Such  traction  as  he  was  required  to  perform  was  the  drawing  of 
war  chariots  and  carriages  of  state  and,  later,  of  carriages  and 
vehicles  for  the  conveyance  of  travelers.  His  speed  fitted  him 
especially  for  this  work.  For  the  slower  and  heavier  work  of 
plowing,  harrowing,  and  drawing  heavy  loads  of  farm  produce 
the  ox  was  long  considered  superior.  In  the  first  place,  he  was 
larger  and  heavier  than  the  horses  of  that  day.  His  heavy  body 
and  short  legs  and  his  general  anatomy  seemed  to  fit  him  pecu- 
liarly for  pulling.  He  fights  by  pushing  with  his  head.  This 
seemed  to  call  into  play  the  same  muscles,  bones,  and  joints  as 
are  used  in  pushing  on  the  yoke.  During  the  last  century  or  so 
the  horse  and  the  mule  have  been  gradually  displacing  the  ox 
even  in  agriculture. 

Displacement  of  the  ox  by  the  horse.  Two  factors  have  con- 
tributed to  this  change  from  the  ox  to  the  horse  and  the  mule  as 
a  source  of  power  for  farm  work.  One  is  the  development  of 
large  and  heavy  breeds  of  horses  of  such  strength  and  docility 
as  to  fit  them  as  well  as  oxen  for  the  pulling  of  heavy  loads. 
The  other  is  the  development  of  farm  machinery.  All  large 
breeds  of  horses,  however,  have  been  developed  in  the  north- 
western parts  of  Europe ;  that  is,  in  Great  Britain,  northern 
France,  Belgium,  Holland,  and  Denmark.  Whether  this  is  due 
to  something  in  the  soil  or  climate  or  simply  to  the  ability  of 
the  people  of  those  countries  as  animal  breeders  it  is  impossible 
to  say.  Russia  and  Hungary  also  are  horse-breeding  countries 
and  use  horses  to  a  certain  extent  for  traction  purposes,  but 
they  have  not  produced  such  huge  draft  horses  as  the  other 
countries  mentioned.  The  United  States  also  is  breeding  large 
numbers  of  heavy  draft  horses,  but  we  have  imported  our  breed- 
ing stock  from  Great  Britain,  France,  and  Belgium.  We  sur- 
pass all  other  countries,  however,  in  the  number,  quality,  and 
speed  of  our  trotting  horses.  The  lighter  breeds  of  horses  not 
only  lack  the  weight  necessary  for  drawing  heavy  loads  but 


1 82  PRINCIPLES  OF  NATIONAL  ECONOMY 

they  are  also  likely  to  be  too  nervous  and  excitable.  The 
United  States  and  Canada,  together  with  the  countries  which 
originated  the  heavy  breeds,  have  pretty  generally  substituted 
the  horse  and  the  mule  for  the  ox  even  in  farm  work. 

The  mule.  Southern  Europe  and  the  southern  part  of  the 
United  States  have  made  large  use  of  the  mule.  This  hybrid, 
combining  something  of  the  patience  and  endurance  of  the  ass 
with  the  size  and  strength  of  the  horse,  is  admirably  adapted 
to  farm  work  in  climates  where  the  huge  draft  horses  of  the 
North  suffer  from  the  heat  and  where  the  lighter  horses  of  the 
South  are  too  nervous  and  excitable  for  the  slow,  heavy  work  on 
the  farm.  Even  the  ass  has  played  a  humble  though  use- 
ful role  by  furnishing  power  to  those  who  could  not  afford  a 
more  expensive  animal,  such  as  a  horse  or  a  mule. 

Both  the  horse  and  the  mule — even  the  huge  draft  breeds — 
have  one  great  advantage  over  the  ox  ;  that  is,  their  more  rapid 
gait.  While  they  cannot  trot  as  well  as  the  lighter  breeds  of 
horses,  they  can  trot  very  much  better  than  the  ox  and  they 
can  walk  much  faster ;  and  in  farm  work  it  is  this  faster  walk 
which  counts. 

The  factor  which  has  had  a  great  deal  to  do  with  the  sub- 
stitution of  the  horse  and  the  mule  for  the  ox  is  the  increased 
use  of  agricultural  machinery.  This  has  required  power  of  a 
superior  kind,  and  the  horse  has  proved  to  be  much  better 
adapted  than  the  ox  to  the  drawing  and  handling  of  machinery. 
This  is  mainly  because  of  his  more  rapid  gait.  When  the 
farmer  has  his  money  invested  in  expensive  machinery  it  is 
important  that  he  get  as  much  work  out  of  it  as  possible.  He 
can  scarcely  afford  to  allow  it  to  run  so  slowly  as  would  be 
necessary  if  it  were  drawn  by  oxen. 

Farm  machinery.  Still  another  factor  which  has  contributed 
to  this  end  is  the  higher  wages  for  farm  labor  in  the  countries 
of  northwestern  Europe,  Canada,  and  the  United  States.  If  a 
farmer  were  hiring  labor  at  a  very  low  wage,  it  would  not  be 
so  important  that  he  get  the  greatest  possible  amount  of  work 
out  of  his  hired  man.  But  when  labor  is  expensive  the  effect  is 


ECONOMIZING  LABOR  183 

very  much  the  same  as  when  tools  and  machinery  are  expensive. 
It  is  thus  important  that  as  much  as  possible  shall  be  accom- 
plished by  each  laborer.  It  is  therefore  better  to  give  him  a 
fast-walking  team  than  a  slow-walking  team. 

Historical  importance  of  the  ox.  The  ox,  however,  from  the 
most  ancient  times  until  quite  recently,  has  been  the  chief  if 
not  the  sole  draft  animal  of  all  the  races  that  have  used  draft 
animals  at  all.  His  docility  and  patience,  his  great  strength, 
the  cheapness  of  his  harness,  and  his  ability  to  find  his  own 
living  when  not  at  work  contributed  to  make  him  a  most  valu- 
able assistant  to  man  in  his  struggle  for  the  conquest  of  the 
earth.  In  the  pulling  of  the  heavy  wooden  plows  and  harrows 
that  were  in  use  before  the  modern  steel  tools  were  invented, 
and  the  lumbering  carts  that  were  in  use  before  modern 
vehicles  were  constructed,  he  enabled  men  to  cultivate  the  soil 
on  a  vastly  more  extensive  scale  than  would  have  been  possible 
by  human  muscles  alone.  He  thus  contributed  to  the  production 
of  food  for  increasing  populations  of  men,  and  in  the  end  he 
contributed  his  own  body  to  help  feed  them,  and  his  own  hide 
in  order  that  they  might  be  shod.  In  many  parts  of  the  world 
he  is  still  the  principal  draft  animal  for  farm  work.  In 
southern  Europe,  southern  Asia,  and  parts  of  South  America 
one  may  still  see  magnificent  teams  of  oxen  at  work  in  the 
fields  and  drawing  carts  along  the  highways.  They  move  with 
a  steadiness  and  massiveness  which  give  the  impression  of  irre- 
sistible power;  but  they  are  too  slow  for  most  of  our  hustling 
Americans,  though  a  good  many  oxen  are  used  in  the  rough  lands 
of  New  England.  If  we  take  the  whole  history  of  man's  use  of 
power,  it  is  probable  that  the  ox  has  furnished  more  in  the 
aggregate  than  any  other  agency,  not  excluding  coal  and  steam. 

Tropical  animals.  The  Asiatic  elephant  and  the  camel  are 
admirably  fitted  for  tropical  and  subtropical  countries,  the 
former  in  moist  and  the  latter  in  dry  climates.  The  African 
elephant  has  never  been  domesticated,  either  because  of  his 
fierce  and  intractable  disposition  or  because  the  natives  of 
Africa  did  not  care  to  domesticate  him.  It  is  a  remarkable  fact 


1 84  PRINCIPLES  OF  NATIONAL  ECONOMY 

that  the  native  African  races  never  domesticate  any  animal, — 
not  even  the  zebra,  which  appears  capable  of  domestication. 
However,  no  other  race  has  reduced  any  animal  to  domestica- 
tion since  prehistoric  times.  Either  prehistoric  man  was  our 
superior  in  this  art  or  else  we  have  not  sufficiently  felt  the  need 
of  any  more  animals.  The  prodigious  strength  and  the  remark- 
able intelligence  of  the  elephant  fit  him  for  a  variety  of  opera- 
tions besides  pulling  loads.  He  requires  considerable  quantities 
of  coarse  fodder  such  as  grows  abundantly  in  warm  and  moist 
countries.  The  great  advantage  of  the  camel  in  dry  countries 
is,  of  course,  his  well-known  ability  to  work  for  long  periods 
without  water.  He  is  used  in  parts  of  southwestern  Asia  and 
northern  Africa.  The  water  buffalo  possesses  qualities  almost 
the  opposite  of  the  camel;  that  is  to  say,  he  can  work  only 
where  water  is  abundant  and  easily  accessible  not  only  for 
drinking  but  for  frequent  bathing  or  wetting  of  the  skin.  He 
is  a  powerful  animal  and  well  adapted  to  working  in  muddy 
lands  and  irrigated  rice  fields. 

In  polar  regions,  where  vegetation  is  scarce,  the  problem  of 
animal  power  is  a  more  difficult  one.  Where  moss  and  lichens 
abound,  the  reindeer  is  a  valuable  source  of  power.  In  the  high 
mountain  regions  of  Peru  the  llama  is  used  for  carrying  loads 
but  not  for  traction.  Where  forage  is  not  found  in  sufficient 
abundance,  but  where  meat  and  fish  can  be  provided,  some 
carnivorous  animal  has  to  be  used.  The  dog  is  the  only  one 
which  is  sufficiently  well  domesticated  to  serve  the  purpose. 

Solar  energy.  The  great  physical  source  of  power,  so  far  as 
man  has  been  able  to  develop  it,  is  understood  to  be  the  sun. 
The  amount  of  solar  energy  which  comes  to  the  earth  in  the 
form  of  light  and  heat  is  so  stupendous  as  to  bewilder  the  im- 
agination. Its  most  important  service  is  in  the  promotion  of 
plant  growth  and,  through  plants,  of  animal  growth ;  but  it  is 
also  transformed  into  mechanical  power  in  a  number  of  ways. 

In  the  first  place,  it  vaporizes  water.  Since  the  air  is  heavier 
than  water  vapor  the  latter  rises,  or,  more  literally,  the  air  falls 
through  gravitation.  When  this  water  vapor  reaches  high  alti- 


ECONOMIZING  LABOR  185 

tildes  and  is  congealed,  it  becomes  heavier  than  air  and  falls 
through  gravitation  in  the  form  of  rain,  snow,  etc.  A  small 
fraction  of  it  falls  on  mountains  and  other  high  portions  of  the 
earth's  surface.  Gravitation  still  pulls  it  downward  through 
the  streams.  These  are  harnessed  and  made  to  turn  water 
wheels,  thus  furnishing  mechanical  power  to  do  man's  work ; 
that  is,  to  move  pieces  of  matter. 

In  the  second  place,  through  plant  growth  combustible  ma- 
terial is  stored  up  in  the  bodies  of  trees  and  other  plants.  When 
this  material  is  burned,  heat  is  developed  which  may  be  used 
to  vaporize  water.  In  the  form  of  vapor  the  water  expands  and 
may  be  made  to  push  a  piston,  which  is,  again,  a  usable  form 
of  mechanical  power  for  the  moving  of  other  bodies.  The  accu- 
mulation and  covering  over  of  vast  masses  of  combustible 
vegetable  material  in  previous  geological  periods  gave  us  our 
coal  beds,  which  have  recently  become  a  principal  source  of 
both  artificial  heat  and  mechanical  power.  It  is  generally  sup- 
posed that  petroleum  is  of  animal  origin.  If  so,  it  is,  like  coal, 
the  product  of  solar  energy.  It  may  be  used,  like  coal,  to 
transform  water  into  steam.  The  internal-combustion  engine 
is  a  later  development  and  is,  in  many  ways,  a  superior  method 
of  transforming  combustion  into  mechanical  power. 

In  the  third  place,  the  direct  rays  of  the  sun  may  be  so  con- 
centrated as  to  produce  an  intense  heat,  which  may,  in  turn, 
be  used  to  transform  water  into  steam.  According  to  tradition 
the  great  mathematician  Archimedes  burned  the  Roman  ships, 
which  were  besieging  his  native  city  of  Syracuse,  by  the  use  of 
a  large  number  of  mirrors.  By  reflecting  the  sun's  rays  from 
all  these  mirrors  upon  a  single  spot,  so  much  heat  was  concen- 
trated as  to  set  the  ships  on  fire,  one  after  another.  Whether 
there  is  any  foundation  of  fact  for  this  story  or  not,  there  is 
no  doubt  as  to  the  possibility  of  producing  an  intense  heat  by 
the  concentration  of  the  rays  of  the  sun.  Anyone  can  demon- 
strate this  with  a  common  burning-glass.  Solar  engines  have 
already  been  constructed  which  make  use  of  converging  mirrors 
for  the  concentration  of  the  sun's  rays.  This  produces  an 


1 86  PRINCIPLES  OF  NATIONAL  ECONOMY 

intense  heat  which,  in  turn,  converts  water  into  steam  and 
moves  a  piston. 

Winds.  In  the  next  place,  if  we  may  assume  that  winds  are 
in  general  caused  by  variations  in  temperature  they  may  be 
said  to  be  derived  from  solar  energy.  This  mechanical  power, 
as  used  for  the  moving  of  boats,  has  been  of  the  very  greatest 
importance  in  the  development  of  commerce  and  the  spread  of 
civilization.  The  epoch-making  voyages  of  Columbus,  as  well 
as  the  voyages  of  great  numbers  of  men  less  noteworthy  than  he, 
were  made  possible  by  the  ingenuity  with  which  man  had  learned 
to  utilize  this  vast  source  of  power.  For  certain  kinds  of  sta- 
tionary work  which  does  not  have  to  be  performed  regularly, 
such  as  pumping  water,  grinding  grain,  etc.,  the  windmill  has 
proved  an  economical  device  for  utilizing  the  power  of  the  winds. 

Tides.  Another  source  of  power  of  which  some  use  has  been 
made  is  the  tide.  This  can  be  traced  to  the  momentum  of  the 
earth  rather  than  to  solar  energy.  The  rising  and  the  falling 
of  the  tides,  especially  along  coasts  with  many  inlets  and 
estuaries,  have  created  opportunities  for  tide  mills,  which  can 
be  made  to  do  certain  kinds  of  work. 

With  all  these  sources  of  power,  and  possibly  others  which 
may  be  developed,  there  is  no  likelihood  that  our  ingenious 
race  will  ever  be  compelled  to  fall  back  upon  its  own  muscles 
or  even  to  depend  exclusively  upon  animal  power.  In  that 
distant  day  when  our  coal  beds  and  oil  fields  are  exhausted,  the 
sun's  rays  will  still  continue  to  strike  the  earth.  That  being  the 
case,  trees  and  other  plants  will  still  grow,  though  wood  could 
scarcely  take  the  place  of  coal  and  petroleum.  Alcohol  can 
scarcely  become  as  cheap  as  gasoline  has  been  in  the  past,  but 
it  can  be  manufactured  in  considerable  quantities  from  a  variety 
of  plants.  Again,  the  rains  and  the  snows  will  continue  to  feed 
our  rivers  and  turn  our  waterwheels.  Electrical  transmission 
will  enable  us  to  utilize  many  streams  now  running  idly  to  the 
sea  and  to  distribute  the  power  over  wide  areas  and  send  it  a 
long  distance  from  the  streams.  Solar  engines  may  be  so  per- 
fected as  to  enable  us  to  utilize  the  inconceivable  and  inexhaust- 


ECONOMIZING  LABOR  187 

ible  flow  of  energy  which  comes  to  us  in  the  form  of  direct  rays 
from  the  sun.  The  winds  will  continue  to  blow  and  push  our' 
sails  and  turn  our  windmills.  And  so  long  as  the  earth  continues 
to  revolve  about  its  axis,  the  tides  will  continue  to  ebb  and  flow, 
and  these  may  furnish  us  considerable  quantities  of  power. 

Even  if  it  should  happen  that  none  of  these  sources  nor  all 
of  them  combined  should  furnish  power  quite  so  cheap  as  that 
which  we  now  enjoy  through  the  use  of  coal,  still  we  may  be- 
come so  well  to  do,  through  improved  agriculture,  improved 
technical  processes  for  utilizing  power,  and  more  rational  habits 
of  living,  as  to  enable  us  to  bear  the  extra  cost  of  these  other 
kinds  of  power  with  no  great  inconvenience.  Even  if  this 
should  not  happen,  it  must  not  be  forgotten  that  a  considerable 
number  of  civilizations  have  been  built  up  and  multitudes  of 
people  have  lived  comfortably  and  happily  with  no  power  ex- 
cept that  of  their  own  muscles,  their  domestic  animals,  the 
winds,  and  the  waterfalls. 

The  steam  engine.  Next  to  the  yoking  of  the  ox  at  some  time 
in  the  prehistoric  past,  the  most  momentous  event  in  the  history 
of  man's  power  was  the  invention  of  the  steam  engine.  The 
reason  why  this  was  so  momentous  was  that  the  coal  beds  of 
the  north-temperate  zone  furnish  a  vast  quantity  of  very  cheap 
and  very  concentrated  fuel.  It  is  difficult  to  see  how  the  heat 
of  burning  coal  could  have  been  transformed  into  mechanical 
power  in  any  other  economical  way.  The  great  cheapness  and 
economy  of  this  source  of  power  is  what  has  made  it  such  a 
powerful  factor  in  the  development  of  modern  industry.  By 
merely  vaporizing  water  in  a  boiler  by  means  of  this  cheap  fuel, 
enormous  pressure  can  be  exerted.  This  pressure  can  be  made 
to  move  a  piston.  From  this  point  on,  further  developments 
are  merely  the  results  of  mechanical  adjustments.  Whenever 
one  object,  such  as  a  piston,  can  be  made  to  move  as  we  want  it 
to  move,  other  objects  can  be  hitched  to" it  and  be  made  to  move 
also.  The  first  of  these  mechanical  adjustments  to  produce 
great  results  was  that  by  which  the  moving  piston  was  made  to 
turn  a  wheel,  thus  converting  linear  motion  into  circular  motion. 


i88 


PRINCIPLES  OF  NATIONAL  ECONOMY 


After  that  adjustment  was  made,  every  form  of  steam-driven 
machinery  became  a  mechanical  possibility. 

Time  does  not  permit  us  to  mention  all  even  of  the  really 
important  adjustments  which  have  been  made  for  the  greater 
utilization  of  the  pressure  of  steam  on  a  movable  piston.  The 
economical  conversion  of  mechanical  power  into  electricity  and 
of  electricity  back  into  mechanical  power  has  enabled  us  to 
utilize  power  in  a  variety  of  ways  which  formerly  were  im- 
practical, besides  giving  rise  to  an  electrical  industry  of  vast 
proportions.  The  internal-combustion  engine  has  made  pos- 
sible automobiles  and  flying  machines. 

Roads.  The  subject  of  roads  and  tracks  would  furnish  an 
interesting  study  to  supplement  a  study  of  power.  The  better 
the  track,  of  course,  the  less  power  it  requires  to  move  an  ob- 
ject. This  would  include  everything  from  the  air  and  the  ocean, 
railway  tracks,  paved  streets,  and  dirt  roads  down  to  the  lubri- 
cated grooves,  cylinders,  and  sockets  through  which  the  parts 
of  a  machine  are  made  to  move.  Roads,  streets,  and  railway 
tracks  will  be  discussed  under  the  head  of  transportation.  The 
rest  must  be  left  to  the  imagination  of  the  student. 

C  Human 


f  Muscular- 


POWER 


.  Animal 


Mechanical 


f  Horses 

Mules 

Asses 

Oxen 

Reindeer 

Buffaloes 

Yaks 

Elephants 

Camels 

Llamas 

Dogs 
("Wind 

f  Streams 
Watery  Waves 
L  Tides 

f  Steam  engines 
tuel    •{  T 

t  Internal-combustion  engines 

.  Solar  engines 


CHAPTER  XII 

ECONOMIZING  LABOR  (CONCLUDED) 
BY  THE  USE  OF  CAPITAL 

What  is  capital  ?  Capital  has  come  to  play  a  very  important 
part  in  modern  industry.  This  increase  in  importance  has 
been  so  great  as  to  lead  to  the  impression  that  capital  has  come 
into  existence  only  in  recent  times.  That  which  is  essentially 
capital  has  been  in  existence  as  long  as  tools  have  been  in  ex- 
istence, but  it  has  taken  on  a  new  and  very  distinct  importance 
since  the  rise  of  machine  production. 

As  a  factor  in  the  modern  economic  system,  capital  may  be 
defined  as  wealth,  other  than  land,  which  is  used  by  its  owner 
to  secure  an  income  rather  than  for  direct  enjoyment.  Land 
and  other  natural  agents  are  usually  treated  as  though  they 
were  in  a  class  by  themselves  and  are  carefully  distinguished 
from  the  products  of  human  industry  and  enterprise.  These 
products  of  industry  and  enterprise  are  again  subdivided,  ac- 
cording to  the  uses  to  which  they  are  put,  into  producers'  goods 
and  consumers'  goods.  Producers'  goods  include  all  tools,  ma- 
chines, buildings,  appliances,  and  other  forms  of  equipment 

f  Land 

Wealth^ 

f  Producers' goods "1  „     .    . 

I  Products  J  "    .         ^    ,        .  .      ,  t       .         }•  Capital 

I  Consumers'  goods  /  Let'  rentcd'  °r  hircd  tO  Others  J 

t  Used  or  consumed  by  their  owners 

which  are  used  for  the  production  of  other  goods ;  while  con- 
sumers' goods,  on  the  other  hand,  include  only  such  goods  as 
are  used  for  direct  enjoyment  rather  than  for  the  purpose  of 
producing  other  goods.  Capital  includes  all  producers'  goods 
and  some  consumers'  goods.  It  includes  all  producers'  goods 

189 


i  go  PRINCIPLES  OF  NATIONAL  ECONOMY 

because  they  are  used  for  the  purpose  of  increasing  the  owner's 
income.  It  also  includes  some  consumers'  goods  because  some 
of  these  are  used  by  their  owners  for  the  purpose  of  securing 
an  income.  A  pleasure  automobile,  for  example,  which  is  let  for 
hire  is  a  consumers'  good  from  the  standpoint  of  society ;  that 
is,  it  is  not  used  to  produce  other  goods  but  is  used  for  direct 
enjoyment  and  satisfaction.  From  the  standpoint  of  its  owner, 
however,  it  is  used  to  get  an  income.  He  gets  no  consumers' 
satisfaction  out  of  it,  but  he  gets  paid  for  its  use,  and  this  pay- 
ment is  a  part  of  his  income.  In  short,  he  keeps  it  for  the 
sake  of  the  income  which  it  brings  him.  A  dwelling  house  is 
likewise  a  consumers'  good  from  the  standpoint  of  society,  but 
if  it  is  rented,  it  is  capital  to  its  owner.  He  gets  no  direct  satis- 
faction out  of  it.  He  gets  money  for  its  use.  This  money  is  a 
part  of  his  income. 

Social  capital  and  private  income.  Some  writers  have  accord- 
ingly spoken  of  two  kinds  of  capital :  first,  social,  or  productive, 
capital ;  and,  second,  private,  or  acquisitive,  capital.  Social,  or 
productive,  capital  is  identical  with  producers'  goods ;  private, 
or  acquisitive,  capital  includes  such  consumers'  goods  as  are 
let,  rented,  or  hired  by  their  owners  to  other  people.  Consum- 
ers' goods,  of  course,  are  just  as  useful  as  producers'  goods,  but 
they  are  used  for  different  purposes.  Therefore  private,  or  ac- 
quisitive, capital  is  just  as  useful  as  social,  or  productive,  cap- 
ital. The  owner  is  just  as  well  entitled  to  his  income  in  one 
case  as  in  the  other.  Capital,  then,  is  goods,  but  it  is  that 
portion  of  the  produced  goods  in  the  possession  of  society  which 
is  used  by  its  owners  for  the  purpose  of  securing  income  rather 
than  for  the  purpose  of  direct  enjoyment.  It  is  used  by  its 
possessors,  however,  as  distinct  from  its  owners,  either  for  the 
production  of  other  goods  or  for  direct  enjoyment.  The  posses- 
sor of  a  rented  shop  is  using  the  shop  for  productive  purposes ; 
the  possessor  of  a  rented  dwelling  house  is  using  it  for  purposes 
of  direct  enjoyment. 

Capital  a  class  of  goods,  not  a  fund  of  value.  Capital  is  some- 
times conceived  of  not  as  a  class  of  goods  but  as  a  fund  of  value. 


ECONOMIZING  LABOR  191 

There  are  two  reasons  which  lead  naturally  to  this  form  of 
statement,  but  there  is  danger  that  this  way  of  thinking  may 
lead  us  into  serious  error.  In  the  first  place,  however  capital 
may  have  originated  historically,  one  nowadays  usually  comes 
into  possession  of  it  first  in  the  form  of  money;  that  is,  the 
owner  of  the  automobile,  the  dwelling  house,  the  shop,  the  fac- 
tory, usually  spent  money  in  order  to  get  it.  The  possession  of 
money  gives  one  the  opportunity  to  come  into  possession  of 
these  other  forms  of  capital.  The  purchase  of  these  various 
forms  of  capital  is  usually  called  investing  capital.  After  one 
has  purchased  a  shop  or  a  factory,  a  house  which  one  intends 
to  rent  to  someone  else,  or  any  other  income-bearing  property 
one  is  said  to  have  invested  his  capital.  That  sounds  as  though 
the  money  were  the  capital  which  one  had  invested.  That  is 
not  strictly  true.  One  has  merely  exchanged  one  form  of  cap- 
ital for  another. 

Money  one  form,  but  only  one  form,  of  social  capital.  The  last 
statement  implies  that  money  is  a  form  of  capital.  This  has 
sometimes  been  disputed.  To  be  sure,  money  is  not  the  only 
form  of  capital,  but  it  is  one  form.  While  it  is  not  correct  to 
say  that  capital  is  money,  it  is  correct  to  say  that  money  is 
capital.  A  work  horse  is  likewise  a  form  of  capital,  but  it  is  not 
proper  to  say  that  capital  is  a  work  horse.  There  is  this  differ- 
ence, however,  between  money  and  work  horses.  Very  few 
capitalists  ever  find  that  the  greater  part  of  their  capital  is  in 
the  form  of  work  horses.  Almost  every  capitalist  nowadays 
finds,  at  one  time  or  another,  that  a  large  part  of  his  capital  is 
in  the  form  of  money  or  has  passed  through  that  form.  He  is 
continually  buying  and  selling,  receiving  money  and  paying  out 
money,  and  is  not  receiving  work  horses  and  paying  out  work 
horses. 

Money  may  be  said  to  be  a  tool  or  a  means  by  which  the 
community  can  do  more  work  than  it  would  be  able  to  do  with- 
out it.  It  is,  therefore,  like  other  tools,  a  form  of  capital. 
It  is  also  a  very  important  form  of  capital,  one  which  is  con- 
tinually coming  into  the  possession  of  every  capitalist  and  be- 


192  PRINCIPLES  OF  NATIONAL  ECONOMY 

ing  paid  out  again.  This  leads  naturally,  as  suggested  above, 
to  the  inference  that  capital  consists  of  a  fund  of  value,  or  of 
value  expressed  in  terms  of  money.  While  there  is  no  objec- 
tion to  continuing  to  speak  of  investing  capital  when  one  is  only 
exchanging  money  for  other  forms  of  capital,  still  one  must  be 
on  one's  guard  against  assuming  that  capital  is  anything  else 
than  goods.  It  is  well  to  remember  also  that  stocks,  bonds, 
mortgages,  etc.  are  not  capital,  but  only  evidences  of  ownership 
of  capital.  The  shares  of  the  stock  of  a  railroad  company,  for 
example,  are  not  themselves  capital ;  they  are  only  evidences  of 
ownership  in  the  railroad  itself,  which  is  the  real  capital. 

Another  reason  which  leads  naturally  to  thinking  of  capital 
as  a  fund  of  value  is  found  in  the  fact  that  capital,  like  all 
wealth,  is  measured  in  terms  of  value  and  its  quantities  ex- 
pressed in  terms  of  money.  There  is  no  good  way  of  saying 
how  much  capital  there  is  in  any  community  or  in  the  posses- 
sion of  any  individual  except  by  saying  it  in  terms  of  money. 
If  any  capitalist  were  asked  how  much  capital  he  possessed,  and 
he  were  to  answer  in  terms  of  tons,  or  cubic  feet,  or  yards,  or 
any  other  unit  of  physical  measurement,  he  would  not  convey 
any  clear  or  definite  idea.  Therefore,  if  you  ask  any  business 
man  to  state  how  much  capital  he  uses  in  his  business  he  can 
answer  you  intelligently  only  by  saying  so  many  dollars  or  so 
many  dollars'  worth.  This  is  a  mere  quantitative  expression. 
If,  however,  you  were  to  ask  him  in  what  his  capital  really  con- 
sists he  could  answer  you  intelligently  only  by  giving  you  an 
inventory  of  the  various  goods  which  make  up  his  fund  of 
capital.  The  only  exception  to  this  case  would  be  the  money 
lender,  whose  capital  consists  solely  of  money. 

Pure  capital  and  capital  goods ;  pure  weight  and  weighty 
objects.  One  may,  however,  reject  the  idea  that  capital  is 
money  and  still  persist  in  the  idea  that  it  is  a  fund  of  value. 
The  distinction  has  sometimes  been  made  between  pure  capital 
and  capital  goods,  pure  capital  being  a  fund  of  value  embodied 
in  the  goods,  and  capital  goods  being  the  things  themselves  in 
which  that  fund  of  value  is  embodied.  The  value  of  the  goods 


ECONOMIZING  LABOR  193 

is  not  capital  any  more  than  the  weight  of  an  object  is  the 
object  itself.  As  stated  above,  value  is  the  attribute  which 
we  use  in  trying  to  arrive  at  a  quantitative  conception  of  the 
real  goods.  It  is  the  only  attribute  which  they  all  possess  in 
common  and  which  at  the  same  time  indicates  their  ability  to 
serve  the  owner's  needs.  The  value,  however,  is  only  a  symptom 
of  that  ability  and  not  a  cause  of  that  ability. 

The  function  of  productive  capital  is  to  aid  in  production. 
Except  in  the  case  of  money  it  is  not  the  value  of  the  goods 
which  enables  them  to  do  their  work.  The  value  is  only  a 
symptom  of  the  fact  that  they  are  doing  that  work.  A  pro- 
ducers' good  which  ceased  to  aid  in  production  would  lose  its 
value ;  a  producers'  good  which  continued  to  be  a  real  aid  in 
production  would  retain  its  value.  The  value  would  be  the 
shadow  of  the  real  thing  and  not  the  substance.  Land  also  has 
value  if  it  is  productive.  But  it  is  not  the  value  which  makes 
it  productive ;  it  is  its  productivity  which  makes  it  valuable. 
In  this  respect  capital  and  land  are  similar.  In  the  case  of  that 
special  kind  of  capital  known  as  money,  and  in  this  case  alone, 
its  usefulness,  its  ability  to  function,  depends  upon  value ;  in 
every  other  case  its  value  depends  upon  its  usefulness  or  its 
ability  to  function. 

Capital  the  result  of  working  and  waiting.  The  next  ques- 
tion to  arise  is,  How  does  capital  come  into  existence?  If  it 
consists  of  tools,  buildings,  machines,  equipment,  etc.,  it  is 
rather  obvious  that  they  come  into  existence  because  labor  is 
expended  in  producing  them.  But  this  does  not  tell  the  whole 
story.  In  order  that  any  community  may  come  into  possession 
of  a  larger  stock  of  tools  and  equipment,  it  must,  temporarily 
at  any  rate,  divert  its  labor  force  from  the  production  of  con- 
sumers' goods  into  the  production  of  these  producers'  goods. 
Whether  it  be  a  communistic  society  or  an  individualistic  so- 
ciety this  physical  fact  remains  the  same.  In  a  communistic 
society,  if  the  stock  of  capital  goods  is  to  be  increased,  some 
labor  must  be  put  to  work  making  tools,  machines,  buildings, 
equipment,  etc.,  and  just  that  much  less  labor  will  be  available 


194  PRINCIPLES  OF  NATIONAL  ECONOMY 

during  that  time  for  the  production  of  consumers'  goods.  Dur- 
ing this  period  the  community  as  a  whole  will  have  fewer  con- 
sumers' goods  than  it  otherwise  might  have  had.  Of  course 
the  expectation  is  that  the  tools  and  equipment,  after  they  are 
produced  and  put  to  use,  will  add  to  the  total  production. 
This,  however,  involves  a  certain  amount  of  postponement  of 
consumption.  The  community  as  a  whole  decides  that  it  will 
have  fewer  consumers'  goods  in  the  present  or  immediate  future 
in  order  that  it  may  have  more  in  the  distant  future.  There  is 
no  possibility  of  evading  this  physical  necessity. 

In  an  individualistic  society,  however,  though  the  same 
physical  necessity  exists,  the  process  is  slightly  different.  Any 
individual  may  decide  that  he  will  consume  a  little  less  in  order 
that  he  may  have  a  little  more  to  consume  in  the  distant  future. 
The  way  he  does  this  is  to  save  and  invest,  or  else  to  turn  aside, 
as  may  have  been  done  in  very  simple  states  of  society,  from 
the  work  of  gathering  consumers'  goods  in  order  to  apply  him- 
self to  the  work  of  making  tools. 

Making  tools  rather  than  consumers'  goods.  A  primitive 
fisherman  has  frequently  been  used  as  an  illustration  of  this 
simple  process.  He  has  been  in  the  habit  of  catching  fish 
with  very  simple  tackle,  but  he  sees  an  opportunity  of  increas- 
ing his  catch  if  only  he  can  get  some  kind  of  boat,  so  he  decides 
to  spend  a  part  of  the  time  each  day  in  making  one.  By  this 
combination  of  frugality  and  industry  he  eventually  comes 
into  possession  of  a  boat  which  thereafter  adds  to  his  income 
and  more  than  compensates  him  for  the  frugality  which  he 
practiced  during  the  period  in  which  the  boat  was  building. 
This  case  is  doubtless  real  enough  to  serve  as  an  illustration  of 
the  essential  process  of  increasing  the  stock  of  capital. 

It  has  not  been  many  generations  since  farmers  used  very 
crude  and  simple  implements,  some  of  which  they  could  make 
for  themselves.  The  farmer  who  made  his  own  plow  was  de- 
priving himself  of  the  opportunity  for  amusement,  which  is  a 
kind  of  consumption,  or  was  reducing  somewhat  his  consump- 


ECONOMIZING  LABOR  195 

tion  of  material  goods  during  the  period  when  the  plow  was 
being  made.  After  it  was  finished  it  assisted  him  in  producing 
subsistence  and  added  to  his  income  available  for  consumption. 
This  is  in  all  essential  particulars  similar  to  the  case  of  the 
primitive  fisherman.  A  little  later,  however,  the  farmer,  in- 
stead of  making  his  own  plow,  hired  a  blacksmith  to  make  it, 
paying  the  blacksmith  money  for  his  work.  Here  we  have  the 
same  combination  of  labor  and  frugality  as  in  the  other  cases, 
the  difference  being  that  in  the  making  of  the  plow  the  black- 
smith does  the  laboring  and  the  farmer  exercises  the  frugality. 
With  the  money  which  he  paid  for  the  plow  he  could  have 
bought  consumers'  goods  and  had  immediate  enjoyment.  He 
postponed  that  enjoyment  when  he  paid  the  money  to  the 
blacksmith  and  received  the  plow.  In  the  then  distant  future, 
however,  the  plow  added  to  his  income  and  enabled  him  to 
make  up  for  the  loss  of  opportunity  for  immediate  consump- 
tion, thus  compensating  him  for  the  postponement  which  he 
underwent  when  he  purchased  the  plow. 

The  modern  farmer,  however,  instead  of  hiring  the  black- 
smith to  make  the  plow,  usually  buys  his  plow  ready-made.  So 
far  as  he  is  concerned  the  act  of  frugality  is  the  same  as  though 
he  deliberately  hired  the  blacksmith  to  make  it.  He  surrenders 
a  certain  amount  of  ready  cash  with  which  he  might  have 
bought  consumers'  goods ;  he  receives  the  plow,  which  for  a 
period  of  years  will  add  to  his  income  and  therefore  compensate 
him.  In  the  making  of  the  plow,  however,  there  were  other 
tools  used,  as  well  as  labor.  Those  other  tools  had  been  made 
in  much  the  same  way  as  the  plow.  Someone  had  invested 
money  in  them  and  then  hired  other  labor  to  use  those  tools  in 
the  making  of  the  plow.  It  has  become,  therefore,  a  very  com- 
plicated process,  but  anyone  who  will  analyze  the  process  will 
find  always  the  same  two  factors  involved ;  namely,  waiting 
and  working, — postponement  of  consumption,  on  the  one  hand, 
labor,  on  the  other.  No  capital  can  ever  come  into  existence 
without  this  combination.  It  is  merely  obscured  by  the  in- 


196          '   PRINCIPLES  OF  NATIONAL  ECONOMY 

tricacies  of  the  modern  industrial  process,  and  it  requires  a 
little  more  intelligence  and  study  to  see  clearly  where  and  how 
the  frugality  and  the  labor  are  combined. 

Separation  of  the  functions  of  working  and  waiting.  In  the 
highly  complicated  industrial  system  of  the  present,  with  its 
increase  of  specialization,  the  two  functions  of  waiting  and 
working  are  generally  performed  by  different  persons  or  classes 
of  persons.  This  has  given  rise  to  some  of  the  most  intricate 
and  most  difficult  of  our  social  problems. 

The  small  farmer,  for  example,  who  owns  his  own  land  and 
his  own  teams  and  farming  outfit  and  who  does  his  own  work 
combines  both  functions.  When  he  bought  his  team  and  outfit 
out  of  his  own  savings,  he  had  to  give  up,  for  the  present,  the 
means  of  buying  consumers'  goods.  That  is,  he  had  to  wait  for 
his  consumers'  enjoyment  until  the  outfit  should  begin  to  earn 
him  something.  If,  however,  he  hires  someone  to  do  his  work, 
there  is  a  separation  of  functions. 

In  a  simpler  state,  in  which  the  same  individual  exercised 
both  functions,  no  social  or  class  antagonisms  were  developed. 
Even  in  the  intermediate  stage,  when  the  farmer  bought  his 
plow  from  the  blacksmith  and  then  used  it  himself,  we  find 
both  functions  performed  by  the  same  individuals.  Class  antag- 
onisms could  hardly  develop  under  these  conditions.  But  when, 
as  in  the  modern  industrial  system,  the  capitalist  (especially  if 
he  be  a  large  capitalist)  lives  mainly  on  the  interest  of  capital, 
while  his  helpers  live  mainly  on  the  wages  of  labor  (in  other 
words,  when  the  two  functions  are  sharply  separated),  class 
feeling  and  class  antagonism  develop.  It  has  come  about  in  our 
urban  industries  that  the  average  person  who  performs  manual 
labor  receives  his  wages  in  weekly  installments  and  spends  them 
mainly  for  consumers'  goods,  whereas  the  very  tools  with  which 
he  works  are  owned  by  other  men  who  have  specialized  in 
the  function  of  investing  their  money  in  capital;  that  is,  in 
tools  and  equipment. 

Separation  of  the  functions  of  the  laborer  and  the  capitalist. 
Capital  has  existed,  of  course,  as  long  as  tools  and  equipment 


ECONOMIZING  LABOR  197 

have  existed,  but  this  separation  of  the  two  functions — that  of 
the  laborer  and  that  of  the  capitalist — has  become  general  only 
since  the  rise  of  machine  production.  Before  that  time  the 
function  of  the  capitalist  was  not  important  enough  to  create 
an  opportunity  for  many  men  to  live  exclusively  by  the  per- 
formance of  this  function.  Not  enough  capital  was  needed  in 
the  primitive  forms  of  industry  which  preceded  the  present  to 
enable  a  large  number  of  men  to  live  on  its  earnings.  It  is  this 
fact  which  is  probably  meant  when  it  is  erroneously  stated  that 
capital  in  the  modern  sense  came  into  existence  with  the  rise  of 
machinery.  Capital  in  the  modern  sense  does  not  differ  from 
capital  in  the  former  or  capital  in  the  ancient  sense ;  it  differs 
only  in  the  sense  that  there  is  more  of  it  and  that  it  is  more 
needed.  This  combination  of  facts — the  fact  that  there  is  more 
needed  than  ever  before  and  that  there  is  more  of  it  supplied 
than  ever  before — has  created  what  we  call  the  capitalist  class 
in  modern  industry,  and  that  is  a  matter  of  the  very  greatest 
importance. 

Coordinating  labor  which  is  performed  at  different  times. 
In  a  somewhat  special  but  very  important  sense  we  may  say 
that  the  function  of  capital  is  to  aid  in  production  by  coordinat- 
ing labor  which  is  performed  at  different  times.  In  the  chapter 
on  The  Division  of  Labor  it  was  pointed  out  that  there  are 
two  distinct  forms  of  the  division  of  labor;  namely,  the  con- 
temporaneous and  the  successive.  Under  our  modern  indus- 
trial system  the  successive  division  of  labor  has  been  greatly 
lengthened.  In  some  cases  many  years  elapse  between  the  be- 
ginning of  a  process  and  the  completion  of  the  production  of  a 
consumable  article,  as  when  mines  are  opened,  ore  is  smelted, 
factories  are  built  and  equipped,  long  before  we  can  begin  to  en- 
joy the  products  of  the  factories.  There  is  a  striking  analogy 
between  the  lengthening  out  of  the  successive  division  of  labor 
and  the  widening  out  of  the  contemporaneous  division  of  labor. 
The  latter  has  been  brought  about  through  improved  means  of 
communication  and  transportation.  It  is  literally  true  at  the 
present  time  that  thousands  of  miles  or  even  half  the  earth's 


198  PRINCIPLES  OF  NATIONAL  ECONOMY 

circumference  may  separate  men  who  are  working  for  the  pro- 
duction of  the  same  article.  The  coordination  of  labor  per- 
formed at  such  widely  separated  points  of  space  is  one  of  the 
most  important  and  striking  aspects  of  the  modern  industrial 
system.  It  is,  however,  no  more  important  or  striking  than  the 
similar  coordination  which  has  taken  place  between  labor  per- 
formed at  widely  separated  points  of  time.  Anyone  who  cares 
to  investigate  this  needs  only  to  find  out  how  long  ago  the  mills 
were  built  which  ground  the  flour  that  entered  into  the  bread 
that  he  ate  for  dinner,  or  the  factories  in  which  his  clothes 
or  his  shoes  were  manufactured.  Even  the  hides  from  which 
his  shoes  are  made  grew  on  animals  that  were  born  several 
years  ago. 

There  are  various  ways  in  which  this  coordination  of  labor 
performed  at  different  times  may  be  presented  to  the  mind.  In 
a  primitive  state  of  industry  each  unit  of  labor  was  performed 
by  men  working  with  few  and  simple  tools.  The  tools  may 
be  said  to  represent  labor  performed  previously.  When  the 
worker  uses  tools  his  work  at  the  present  time  is  coordinated 
with  the  work  of  the  man  who  made  them.  But  since  the 
tools  were  very  few  and  simple,  it  would  be  correct  to  say  that 
a  given  unit  of  present  labor  is  being  coordinated  with  a  very 
small  amount  of  past  labor.  Under  modern  conditions  the  aver- 
age laborer  is  using  more  tools,  as  well  as  larger  and  more  com- 
plicated machinery,  than  were  used  by  the  primitive  laborer. 
These  large  and  complicated  machines,  like  the  primitive  tools, 
represent  labor  performed  at  a  previous  time.  The  labor  of  the 
workmen  using  them  is  literally  being  coordinated  with  the 
labor  of  the  men  who  made  the  machines.  Since  the  tools  are  so 
numerous,  costly,  and  complicated,  it  is  correct  to  say  that  a 
given  unit  of  present  labor  is  being  coordinated  with  a  large 
amount  of  past  labor. 

One  of  the  fundamental  changes  which  have  come  about  as 
a  result  of  the  modern  system  of  machine  production  is  that  of 
coordinating  a  given  quantity  of  present  labor  with  a  much 
larger  amount  of  past  labor  than  was  the  case  under  simpler 


ECONOMIZING  LABOR  199 

conditions.  That  is  to  say,  in  a  simple  state  of  industry  a  given 
quantity  of  present  labor  would  work  in  coordination  with  a 
small  amount  of  past  labor.  At  the  present  time,  however,  a 
given  quantity  of  present  labor  is  found  to  be  working  in 
coordination  with  a  large  quantity  of  past  labor. 

The  coordination  of  labor  performed  at  different  points  in 
space  does  not  take  place  of  its  own  accord.  It  is  done  through 
agencies  of  transportation  and  communication.  Similarly,  the 
coordination  of  labor  performed  at  different  points  of  time  does 
not  take  place  of  itself ;  it  takes  place  because  of  the  willingness 
of  men  to  wait, — to  spend  their  money  for  producers'  goods 
rather  than  for  consumers'  goods.  If  no  one  were  willing  to 
wait,  if  no  one  were  willing  to  postpone  consumption,  if  every- 
one insisted  on  living  from  hand  to  mouth  as  the  spendthrift 
does,  there  could  be  no  effective  coordination  of  labor  per- 
formed at  different  times. 

Lengthening  the  process  of  production.  In  order  that  there 
may  be  factories,  mines  must  be  opened  and  ore  extracted.  No 
one  wants  ore  for  its  own  sake;  it  is  desired  because  it  is  a 
means  of  getting  something  in  the  distant  future  which  will  be 
desirable  for  its  own  sake.  Ore  must,  therefore,  be  smelted 
and  purified  into  iron  and  steel.  Again,  no  one  wants  iron  and 
steel  for  their  own  sake,  but  solely  because  in  the  distant 
future  these  commodities  will  be  the  means  of  getting  things 
that  are  desirable  in  themselves.  Again,  iron  and  steel  must  be 
made  into  machinery.  But  no  one  wants  machinery  for  its 
own  sake.  Machines  are  wanted  only  as  they  will  help  to  pro- 
duce things  desirable  for  their  own  sake.  It  is  this  constant 
looking  ahead  and  taking  thought  for  the  future,  accompanied 
by  the  postponing  of  present  consumption  in 'favor  of  future 
consumption,  that  makes  possible  the  coordination  of  labor  per- 
formed at  different  times. 

Combination  of  factors.  Something  more  than  frugality, 
thrift,  and  foresight  are  necessary,  however.  Without  mechani- 
cal ingenuity,  however  frugal,  thrifty,  and  farsighted  a  person 
might  be,  he  would  find  it  difficult  to  exercise  these  qualities 


200  PRINCIPLES  OF  NATIONAL  ECONOMY 

profitably.  Unless  someone  were  able  to  invent  superior  meth- 
ods of  production  which  required  the  exercise  of  those  qualities 
they  would  be  of  comparatively  little  economic  advantage  to 
those  who  possessed  them. 

Here  we  have  an  example  of  a  class  of  cases  which  con- 
tinually perplex  the  amateur  student  of  economics.  There  are 
cases  where  two  or  more  factors  are  absolutely  necessary  to  get 
a  given  result.  Fundamentally  the  problem  is  no  more  obscure 
than  that  involved  in  the  formula  2x3  —  6.  The  students  will 
agree  that  2  is  just  as  essential  as  3,  and  3  as  essential  as  2, 
in  getting  6.  Other  problems  of  a  similar  kind  are  found  in 
every  field  of  science  as  well  as  in  arithmetic.  Oxygen  and 
hydrogen  are  equally  necessary  to  the  formation  of  water ;  air 
and  gasoline  must  be  mixed  in  the  carburetor  in  order  that  there 
may  be  an  explosion  in  the  gasoline  engine.  One  is  as  essential 
as  the  other.  The  upper  and  the  nether  millstone  must  work 
together  in  the  old-fashioned  mill  to  grind  wheat.  Two  sets  of 
rollers  are  necessary  in  the  modern  flour  mill. 

In  the  higher  realms  of  economics  we  find  numerous  examples 
of  the  same  type  of  problem.  Forethought  and  inventiveness 
are  examples  of  mental  qualities  which  are  combined  to  secure 
mechanical  progress.  However  inventive  men  may  be  in  con- 
triving mechanical  improvements,  unless  someone  is  willing  to 
perform  labor  long  in  advance  of  the  consumption  of  the  prod- 
ucts of  these  mechanical  improvements,  or  pay  someone  else 
for  performing  that  labor,  all  these  mechanical  contrivances  will 
remain  either  in  the  brains  of  the  inventors  or  in  museums. 

When  one  has  spent  his  money  for  iron  ore,  or  for  tools  of 
any  kind,  one  has  become  a  capitalist.  He  has  bought  something 
of  no  immediate  use  to  him  as  a  consumer,  but  something  which 
is  a  means  by  which  in  the  future  he  may  get  consumers'  goods. 
Because  there  are,  in  any  community,  men  who  are  willing  to 
do  this,  there  is  a  market  for  the  genius  of  the  inventor.  Sim- 
ilarly, because  inventors  will  devise  mechanical  appliances  and 
improvements,  there  is  an  opportunity  for  the  investor  to  be- 
come a  capitalist, — a  buyer  of  tools  and  contrivances. 


THRIFT  AND  NATION  BUILDING  201 

These  two  functions — that  of  the  inventor  and  that  of  the  in- 
vestor— are  absolutely  necessary,  whatever  the  type  of  social 
organization  may  be.  Even  in  a  communistic  society  the  work 
of  the  inventor  amounts  to  nothing  unless  the  society  as  a  whole 
undertakes  what,  in  the  present  order  of  society,  the  individual 
capitalist  undertakes ;  namely,  to  set  men  to  work  at  making 
tools  and  to  pay  them  wages  while  they  are  about  it.  One 
important  difference  between  socialism  and  individualism  is 
this:  socialism  proposes  that  society  as  a  whole  shall  do  pre- 
cisely what  in  an  individualistic  society  the  capitalist  does  as 
an  individual. 

The  productivity  of  capital.  There  are  some  extreme  so- 
cialists who  deny  that  the  capitalist  performs  any  necessary 
function.  If  that  were  true  it  would  be  hard  to  frame  an  argu- 
ment to  show  that  society  as  a  whole  should  do  precisely  what 
the  capitalist  is  doing.  The  socialist  would  then  have  to  admit 
that  the  capitalist,  instead  of  performing  a  useless  function,  per- 
forms a  most  important  one, — so  important  that  society  as  a 
whole  should  take  it  over.  To  say  that  society  should  do  its 
own  investing  is  to  say  that  it  should  become  its  own  capitalist. 
This  would  present  a  question  to  be  debated.  The  question 
might  be  stated  as  follows :  Can  the  useful  function  of  coordi- 
nating labor  performed  at  different  times  be  done  more  econom- 
ically and  satisfactorily  by  the  state,  or  by  society  as  a  whole, 
than  by  private  individuals  ?  Or  the  question  might  be  put  in 
this  way :  What  forms  of  investment  and  ownership  should  be 
undertaken  by  society  as  a  whole  and  what  should  be  left  to 
private  individuals?  Only  extremists  would  refuse  to  discuss 
this  question.  There  are,  however,  some  who  are  so  very  ex- 
treme as  to  deny  that  the  state  or  society  should  do  any  invest- 
ing or  own  any  capital.  Others  go  to  the  opposite  extreme  by 
denying  that  the  individual  should  do  any  investing  or  own  any 
capital.  Wisdom  probably  lies  somewhere  between  the  two 
extremes.  The  real  difference,  therefore,  between  the  reasonable 
socialist  and  the  reasonable  individualist  is  one  of  degree.  The 
reasonable  individualist  will  maintain  that,  in  the  absence  of  a 


202  PRINCIPLES  OF  NATIONAL  ECONOMY 

special  or  convincing  reason  to  the  contrary,  the  individual 
should  be  allowed  to  invest  and  to  own  capital,  and  that  the  case 
must  be  proved  against  him  before  he  is  forbidden  to  do  so. 
The  reasonable  socialist,  on  the  other  hand,  holds  that  the  pre- 
sumption is  in  favor  of  public  and  against  private  ownership  of 
capital, —  that,  unless  special  and  convincing  reason  to  the  con- 
trary is  shown,  the  public  and  not  private  individuals  should 
own  capital.  He  places  the  burden  of  proof  on  the  one  who 
wishes  to  own  private  capital. 


CHAPTER  XIII 
THE  RELATION  OF  THRIFT  TO  NATION  BUILDING 

The  ultimate  purpose  of  thrift.  That  increasing  supplies  of 
capital,  either  public  or  private,  are  necessary  to  the  attainment 
of  the  highest  national  prosperity,  can  scarcely  be  denied.  Un- 
less the  public  should  undertake  the  task  of  setting  aside  by 
law  a  portion  of  the  national  income  for  the  purpose  of  increas- 
ing the  fund  of  capital,  it  must  be  done  by  the  action  of  private 
individuals.  This  calls  for  the  exercise  of  the  virtue  of  thrift.1 

What  is  thrift  ?  In  order  to  get  a  clear  idea  of  the  relation 
of  thrift  to  the  strength  of  the  nation  it  will  be  necessary  to 
analyze  the  nature  of  thrift.  To  begin  with,  it  should  be  per- 
fectly clear  that  thrift  does  not  mean  the  hoarding  of  money. 
To  hoard  money  is  one  of  the  most  thriftless  things  one  can  do 
with  it.  The  miser  of  romance  who  kept  his  money  in  a  secret 
hoard  where  he  might  gloat  over  it  and  enjoy  the  sensations  of 
feeling,  hearing,  and  seeing  it  was,  in  the  strictest  possible  sense, 
a  thriftless  consumer  of  wealth.  Instead  of  using  money  as  a 
tool  of  production  or  instrument  of  business,  he  was  using  it  as  a 
means  of  direct  physical  enjoyment.  To  use  it  for  the  adorn- 
ment of  his  body  would  scarcely  have  been  more  frivolous, 
thriftless,  or  selfish. 

Spending  money  wisely.  Thrift,  no  less  than  extravagance, 
consists  in  using  money ;  that  is,  in  spending  it.  The  sole  dif- 
ference is  in  the  purpose  or  purposes  for  which  it  is  spent.  To 
spend  money  for  immediate  and  temporary  gratification  is 
extravagance ;  to  spend  it  for  things  which  add  to  one 's  power, 
mental,  physical,  moral,  or  economic,  is  thrift ;  to  spend  it  for 

1See  monograph  by  the  author,  entitled  "War  Thrift."  Carnegie  Endowment 
for  International  Peace,  1919. 

203 


204  PRINCIPLES  OF  NATIONAL  ECONOMY 

tools  of  production  wherewith  one  may  increase  one's  produc- 
tive power  is  thrift.  For  a  farmer  to  spend  money  on  a  luxuri- 
ous automobile,  when  he  needs  a  tractor  with  which  to  cultivate 
his  land,  is  extravagance ;  to  spend  the  same  amount  of  money 
for  a  tractor,  when  he  needs  one  with  which  to  cultivate  his  land 
more  thoroughly  and  increase  his  productive  power,  is  thrift. 
Money  is  spent  as  truly  in  one  case  as  in  the  other.  It  stimu- 
lates business  as  effectively  in  one  case  as  in  the  other.  But 
when  money  is  spent  extravagantly  it  adds  nothing  to  the  pro- 
ductive power  either  of  the  individual  or  of  the  nation.  To 
spend  it  thriftily  is  to  add  to  the  productive  power  of  both  the 
individual  and  the  nation. 

What  if  everyone  were  thrifty.  It  is  sometimes  argued,  of 
course,  that  if  everybody  spent  all  his  surplus  income  for  tools 
of  production  and  nobody  spent  anything  for  luxuries,  there 
would  soon  be  overproduction ;  that  is,  the  community  would 
soon  have  such  a  supply  of  tools  of  production  as  to  enable  it 
to  produce  more  than  its  thrifty  consumers  were  willing  to  buy. 
Whatever  validity  this  argument  may  have  sometime,  it  would 
obviously  not  apply  to  normal  conditions  when  the  danger  is 
not  of  overproduction  but  of  underproduction ;  when  the  prob- 
lem is  not  how  to  consume  the  things  which  are  produced  but 
how  to  produce  the  things  which  are  necessary  to  the  building 
up  of  the  country ;  not  how  to  give  the  people  the  largest  num- 
ber of  pleasurable  sensations  but  how  to  develop  the  maximum 
national  strength. 

Effects  of  thrift.  The  fear  of  overproduction  is  groundless, 
even  in  normal  times.  The  tendency  in  a  thrifty  community  is 
for  capital  (that  is,  the  tools  of  production)  to  increase  and 
become  so  abundant  as  to  reduce  the  rate  of  interest,  giving  the 
owners  of  capital  a  smaller  share  of  the  product  and  conse- 
quently giving  the  other  participants  in  production  a  larger 
share.  In  addition  there  is  a  larger  production  in  a  thrifty 
community  because  such  a  community  is  well  supplied  with  all 
tools  and  instruments  of  production.  The  danger  that  there 
should  be  an  oversupply  of  capital  (that  is,  of  tools)  is  counter- 


THRIFT  AND  NATION  BUILDING  205 

acted  by  the  tendency  of  interest  rates  to  fall,  thus  reducing 
somewhat  the  inducement  to  save.  The  economic  forces  work 
in  precisely  the  same  way  to  check  the  overaccumulation  of 
capital  as  they  do  to  check  the  overproduction  of  wheat,  pota- 
toes, or  anything  else.  When  there  is  a  tendency  toward  the 
overproduction  of  wheat  the  price  tends  to  fall,  and  this  acts  as 
an  automatic  check  on  further  production  by  removing  one  of 
the  inducements  to  the  production  of  wheat. 

Thrift  and  overproduction.  The  theory  that  too  much  thrift 
would  result  in  overproduction  is  precisely  like  the  theory  that 
too  much  industry  would  do  the  same  thing.  One  might  argue 
that  if  our  moralists  and  preachers  of  righteousness  continue  to 
extol  the  virtue  of  industry  and  encourage  all  the  people  to 
work  rather  than  to  waste  their  time  in  sloth  and  idleness,  the 
people  might  make  the  mistake  of  producing  too  much.  Thrift 
and  industry  have  very  much  the  same  effect  in  the  long  run  on 
the  total  volume  of  production.  Thrift  is  the  means  by  which 
the  community  equips  itself  with  durable  goods  and  with  the 
instruments  of  production.  The  community  that  spends  all  its 
income  for  immediate  gratification  can  never  add  to  its  indus- 
trial equipment.  The  community  that  spends  a  part  of  its 
income  not  for  immediate  gratification,  but  for  the  distant 
future,  for  things  which  add  nothing  to  its  immediate  satisfac- 
tion but  which  increase  its  productive  equipment,  is  a  com- 
munity which  grows  in  productive  power  from  year  to  year  and 
from  generation  to  generation.  Industry  without  thrift  is  as 
ineffective  as  is  thrift  without  industry.  The  two  together  form 
the  twin  pillars  of  all  industrial  prosperity. 

Spending  money  and  hiring  labor.  What  has  been  said  re- 
garding thfe  direction  in  which  money  is  spent  leads' naturally 
to  a  consideration  of  the  function  of  the  spending  of  money  in 
giving  direction  to  the  national  energy.  The  energy  of  a  com- 
munity or  a  nation  is  directed  either  by  authority  or  by  persua- 
sion. Men  do  either  what  they  are  told  or  what  they  are 
persuaded  to  do.  By  persuasion,  however,  is  meant  not  merely 
verbal  argument  and  wheedling ;  it  includes  the  lure  of  personal 


206  PRINCIPLES  OF  NATIONAL  ECONOMY 

advantage,  the  desire  of  pleasing  someone  whose  good-will  is 
esteemed,  and  a  multitude  of  other  things, — in  short,  it  includes 
practically  everything  which  induces  a  man  to  act  or  which 
supplies  him  with  motivation,  except  the  fear  which  lies  back  of 
all  authority.  Not  the  least  important  among  the  various  forms 
of  persuasion  is  the  offer  of  a  reward,  pecuniary  or  otherwise. 
To  offer  a  price  for  a  commodity  or  a  service  is  to  attempt  to 
persuade  someone  to  produce  the  commodity  or  to  render  the 
service.  Among  all  free  peoples  this  form  of  persuasion  has 
come  to  play  a  very  large  part  in  the  direction  of  national 
energy.  The  gradual  substitution  of  this  form  of  persuasion  for 
government  authority  is  one  of  the  most  significant  earmarks  of 
progress.  In  a  low  state  of  civilization  and  in  a  militant  society 
men  do  very  largely  what  they  are  ordered  to  do  by  government 
authority.  In  a  higher  and  freer  state  of  civilization  they  do  more 
and  more  what  they  are  persuaded  to  do  by  the  prices  which  are 
offered  on  the  market.  A  high  price  for  one  thing  and  a  low 
price  for  another  mean  a  larger  inducement  for  the  production 
of  one  thing  and  a  smaller  inducement  for  the  production  of  the 
other.  A  rising  price  for  one  thing  and  a  falling  price  for  an- 
other represent  the  attempt  of  the  purchasing  public  to  induce 
more  productive  energy  to  begin  producing  one  thing  and  less 
productive  energy  to  remain  in  the  production  of  the  other. 

Redirection  of  national  energy.  Suppose,  for  example,  it 
were  a  foregone  conclusion  that  many  more  shoes  were  needed 
than  were  in  process  of  production.  There  would  be  two  ways 
of  increasing  the  production  of  shoes.  In  the  one  case  the 
government  might  by  its  own  •  authority  order  an  increase  of 
production,  and  detail  a  certain  number  of  men  from  other  in- 
dustries or  command  them  to  enter  the  shoemaking  industry. 
In  the  other  case  they  who  want  more  shoes  than  they  have 
begin  to  bid  for  them  and  offer  higher  prices  in  order  to  get 
them.  These  higher  prices  have  the  same  effect  in  redistribut- 
ing the  labor  power  of  the  country  as  the  government  order 
would  have  in  the  other  case.  In  order  to  obtain  these  higher 
prices,  existing  factories  would  speed  up,  would  run  overtime, 


THRIFT  AND  NATION  BUILDING  207 

would  employ  more  men,  or  else  new  factories  would  be  built 
to  meet  the  increasing  demand. 

In  case  the  desires  of  the  public  should  undergo  a  consider- 
able change,  and  the  people  should  stop  caring  for  one  class  of 
commodities  and  begin  caring  intensely  for  an  entirely  different 
class,  the  same  alternative  methods  would  present  themselves. 
It  would  be  necessary,  of  course,  in  order  that  production  might 
adjust  itself  to  the  demands  of  the  consumers,  that  considerable 
productive  power  should  be  transferred  either  directly  or  indi- 
rectly from  the  industry  which  was  producing  the  article  for 
which  there  is  a  shrinking  demand  to  the  industry  which  was 
producing  the  article  for  which  there  is  an  expanding  demand. 
This  transfer  of  productive  power  could  be  effected  by  govern- 
ment authority.  The  government  could  merely  say  to  a  certain 
number  of  men,  "Leave  this  industry  and  go  and  work  in  the 
other,"  precisely  as  soldiers 'are  ordered  to  transfer  their  efforts 
from  one  part  of  the  field  to  another.  In  a  low  state  of  civili- 
zation this  method  is  used  in  redistributing  the  forces  of  the  in- 
dustrial army,  but  in  all  higher  civilizations  the  method  is  that 
of  persuasion.  The  article  for  which  the  people  no  longer  care 
will  not  be  bought  in  large  quantities,  and  the  people  will  not 
be  willing  to  pay  a  high  price  for  it.  That  in  itself  will  partially 
remove  the  inducement  to  production.  A  certain  amount  of 
productive  power  will  therefore  be  released  from  this  industry. 
On  the  other  hand,  the  article  for  which  there  is  an  increasing 
demand  cannot  at  once  be  supplied  in  sufficient  quantities  to 
meet  that  demand.  Some  consumers  will  not  be  able  to  get 
what  they  want,  and  they  will  begin  bidding  against  one  another 
for  the  limited  supply,  thus  forcing  the  price  up.  This  advance 
in  price  is  the  persuasion  which  will  lead  investors,  manufac- 
turers, and  laborers  to  go  into  the  industry  which  produces  the 
article  in  question.  Thus,  in  the  course  of  time,  the  transfer 
of  productive  power  from  the  contracting  to  the  expanding 
industry  is  made  as  effectively  as  though  it  had  been  made  by  a 
government  order.  It  may  be  made  a  little  less  promptly,  but 
much  less  violently,  with  less  disturbance  and  with  greater  econ- 


208  PRINCIPLES  OF  NATIONAL  ECONOMY 

omy.  In  the  industrial  field  promptness  and  secrecy  are  of  less 
importance,  and  economy  is  of  greater  importance.  That  is 
why  the  tendency  in  all  advanced  industrial  communities  is 
toward  the  method  of  price  persuasion  and  away  from  the 
method  of  government  compulsion. 

Effects  of  thriftlessness.  Before  we  are  in  a  position  to  under- 
stand the  fundamentals  of  the  thrift  question  it  cannot  be  too 
much  emphasized  that  in  a  free  industrial  society  the  way  in 
which  the  people  spend  their  money  determines  the  direction  in 
which  the  productive  energy  of  the  community  is  utilized.  If, 
for  example,  no  one  is  willing  to  purchase  tools,  or  instruments 
of  production,  but  everyone  demands  articles  of  immediate  en- 
joyment, tools  will,  of  course,  have  no  buyers  and  the  tool- 
making  industries  will  have  no  inducement  to  expand  or  even  to 
continue.  All  the  productive  energy  will  be  absorbed  by  the 
luxury-producing  industries  and  even  they  will  be  poorly 
equipped,  because  no  one  will  be  willing  to  invest  in  equipment. 
Where  one  group  of  people  is  demanding  luxuries  for  immedi- 
ate consumption  and  another  group  is  willing  to  invest  in  the 
tools  of  production,  the  latter  group  may  then  equip  the  luxury- 
producing  industries  with  tools  in  order  to  produce  for  the 
supply  of  the  former  group.  If  all  were  willing  to  spend  money 
on  tools  and  no  one  were  willing  to  spend  very  much  on  extrava- 
gant frills,  there  would  be  an  abundance  of  tools  for  the  produc- 
tion of  all  the  things  which  would  supply  the  moderate  needs  of 
the  community.  With  these  moderate  needs  supplied  by  the 
abundant  productive  power  of  the  community,  the  people  could 
work  either  short  hours  or  in  a  leisurely  manner,  or  they  could 
use  their  abundant  energy  in  producing  things  of  durable  or 
permanent  value,  such  as  school  buildings  of  architectural 
beauty,  roads,  irrigation  projects,  the  drainage  of  swamps,  and 
in  various  other  enterprises  which  would  provide  for  posterity, 
enlarge  the  possibility  of  life  in  the  national  territory,  and 
greatly  expand  the  national  power  and  greatness. 

Spending  money  for  things  we  like  best.  If  the  people  of 
Athens  had  chosen  not  to  adorn  the  Acropolis  with  architectural 


THRIFT  AND  NATION  BUILDING  209 

monuments,  they  might  for  a  long  time  have  consumed  somewhat 
more  luxurious  food,  worn  somewhat  more  costly  apparel,  and 
amused  themselves  in  somewhat  more  expensive  ways ;  that  is, 
they  could  have  devoted  the  national  energy  to  the  production 
of  more  luxurious  food,  clothing,  and  so  forth.  Instead  of  that, 
they  chose  to  consume  slightly  less  luxurious  food  and  to  wear 
slightly  less  costly  clothing  than  they  might  have  had,  in  order 
to  erect  those  buildings  which,  if  the  Athenians  had  done  noth- 
ing else,  would  have  helped  to  justify  their  existence.  It  was 
the  direction  in  which  they  decided  to  spend  their  money  which 
decided  whether  the  national  energy  should  be  used  in  the  pro- 
duction of  ephemeral  utilities  or  durable  sources  of  satisfaction. 

The  people  of  those  medieval  cities  who  erected  cathedrals 
as  monuments  of  their  religious  faith  could,  if  they  had  chosen 
otherwise,  have  fed,  clothed,  and  amused  themselves  in  more 
expensive  ways ;  that  is,  the  man  power  which  was  used  in  the 
erection  of  churches  could  have  been  used  in  the  produc- 
tion of  objects  of  temporary  gratification.  They  chose  to  spend 
their  money  for  durable  rather  than  for  perishable  goods,  and 
that  is  why  the  world  was  enriched  by  the  religious  architecture 
of  the  medieval  period.  Any  modern  city  that  chooses  to  get 
along  with  ineffective  school  buildings  can  for  a  few  years  keep 
its  tax  rate  down  slightly  and  the  people  may  therefore  have  a 
little  more  money  to  spend  on  trivialities.  If,  on  the  other  hand, 
they  choose  to  construct  school  buildings  whose  architecture 
will  enrich  the  world  as  did  the  church  architecture  of  the 
medieval  period,  they  will  have  to  cut  down  the  amount  of 
money  which  they  would  spend  for  other  things  and  release  a 
certain  amount  of  productive  energy  from  the  manufacture  of 
frills  and  luxuries,  so  as  to  make  it  available  for  the  production 
of  these  objects  of  durable  satisfaction. 

Whether  one  thinks  that  it  was  the  thrift  or  the  extravagance 
of  the  Athenians  that  built  the  Parthenon  will  depend  upon 
whether  one  thinks  that  the  building  of  the  Parthenon  was 
an  important  thing  to  do  or  not.  If  he  regards  it  as  a  trivial- 
ity, then  he  will  call  the  building  of  it  an  extravagance,  and 


210  PRINCIPLES  OF  NATIONAL  ECONOMY 

doubtless  think  how  much  better  it  would  have  been  if  the 
Athenians  had  used  the  same  amount  of  money  in  purchasing 
and  the  same  amount  of  energy  in  producing  things  which 
would  have  fed  their  bellies  or  adorned  their  bodies.  If,  on  the 
other  hand,  he  thinks  that  it  was  a  very  important  thing  to  do — 
more  important  than  anything  else  that  they  could  probably 
have  done  with  their  money  and  their  productive  energy — he 
will  say  that  it  was  thrift  which  built  the  Parthenon.  The 
same  question  might  be  discussed  with  respect  to  the  religious 
architecture  of  the  Middle  Ages,  and  the  same  question,  of 
course,  arises  in  every  city  of  the  present  day  when  the  problem 
of  school  architecture  is  discussed.  To  one  who  regards  school 
architecture  as  a  triviality  the  erection  of  magnificent  and  well- 
equipped  school  buildings  would  seem  an  extravagance ;  he 
would  doubtless  regret  that  so  much  productive  power  should 
be  used  in  the  building  of  such  things  when  it  might  be  used  for 
the  production  of  articles  that  would  gratify  the  appetite  or 
some  other  temporary  desire.  But  to  one  who  regards  school 
architecture  as  something  very  important,  the  erection  of  such 
school  buildings  as  some  people  would  like  to  see  would  seem 
an  act  of  thrift. 

Summary.  The  general  argument  for  thrift  may  be  sum- 
marized as  follows  :  He  who  saves  money  and  invests  it  wisely 
does  himself  good  in  two  ways.  He  gains  directly  by  having  an 
income  in  addition  to  his  wages  or  his  salary.  He  gains  indi- 
rectly by  making  better  conditions  for  everybody,  including 
himself. 

It  is  easy  to  see  that  he  gains  directly.  To  have  a  hundred 
dollars  invested,  even  at  4  per  cent,  is  better  than  not  to  have 
it.  It  gives  him  four  dollars  a  year  over  and  above  his  other 
income;  and  four  dollars  a  year,  small  as  it  is,  is  not  to  be 
despised. 

It  is  not  so  easy  to  see,  but  it  is  none  the  less  true,  that 
saving  and  wise  investing  make  conditions  better  for  every- 
body, including  oneself.  To  save  and  invest,  as  stated  above, 
is  not  to  hoard.  It  is  to  buy  things  which  are  needed  for  pro- 


THRIFT  AND  NATION  BUILDING  211 

duction  or  defense  instead  of  things  which  are  good  only  for 
consumption  or  pleasure.  To  buy  things,  such  as  tools,  ma- 
chines, buildings,  etc.,  which  aid  in  production  is  to  encourage 
the  making  of  such  things.  When  many  people  are  invest- 
ing in  tools,  many  tools  will  be  produced  and  industry  will 
then  be  well  equipped  with  aids  to  production.  In  short, 
there  will  be  many  factories  well  equipped  with  buildings, 
machines,  and  materials.  That  is  a  condition  in  which  there 
is  much  employment. 

One  may  buy  either  directly  or  indirectly  those  things  which 
aid  in  production.  When  a  farmer  buys  a  traction  engine 
rather  than  a  luxurious  automobile  he  is  buying  directly  a  thing 
which  aids  in  production,  rather  than  an  article  of  consumption. 
If  he  has  bought  wisely  the  traction  engine  will  aid  him  to  grow 
a  larger  crop,  which  is  a  good  thing  for  him.  It  will  also  increase 
the  food  supply,  which  is  a  good  thing  for  everybody.  The 
more  farmers  there  are  who  save  money  and  invest  it  in  instru- 
ments which  aid  in  production,  the  better  production  we  shall 
have  and  the  better  the  world  will  be  fed.  When  a  factory 
owner  builds  an  addition  to  his  factory  rather  than  a  new  dwell- 
ing house,  he  is  buying  directly  various  things  which  aid  in 
production.  If  he  builds  wisely  he  will  add  to  his  income,  which 
is  a  good  thing  for  him.  It  will  also  add  to  the  productive 
power  of  the  community,  which  is  a  good  thing  for  everybody. 
It  is  a  good  thing  especially  for  laborers,  because  it  will  require 
more  laborers  to  run  the  enlarged  factory  than  were  required  be- 
fore it  was  enlarged.  In  short,  it  increases  the  demand  for  labor. 

The  more  people  there  are  who  save  their  money  and  buy 
tractors,  machines,  factory  buildings,  and  all  other  aids  to  pro- 
duction, the  better  the  community  will  be  supplied  with  all  such 
things.  The  better  the  community  is  supplied  with  all  such 
things,  the  greater  its  productive  power  and  the  greater  the  op- 
portunities for  productive  employment.  That  is  the  reason 
why  laborers  always  emigrate  from  a  country  where  there  is 
little  saving  and  investing  to  a  country  where  there  is  much 
saving  and  investing. 


212  PRINCIPLES  OF  NATIONAL  ECONOMY 

Indirect  buying  of  producers'  goods.  But  one  may  buy  indi- 
rectly things  which  aid  in  production.  When  one  deposits 
money  in  a  savings  bank,  the  bank  will  invest  it.  It  may  lend  it 
to  some  farmer  who  wants  to  buy  a  tractor,  a  team,  a  cow,  or 
some  other  aid  to  production.  It  may  buy  part  ownership  in 
some  factory  or  in  some  other  way  encourage  the  buying  of  aids 
to  production.  The  saver  may  himself  buy  the  share  in  some 
corporation.  In  that  case  he  becomes  a  part  owner  in  the  fac- 
tory or  whatever  it  is  that  the  corporation  owns.  In  all  these 
ways  and  in  many  others  one  may  buy  indirectly  all  sorts  of 
things  which  aid  in  production. 

Indirect  buying  of  such  things  has  the  same  effect  as  direct 
buying.  It  encourages  others  to  make  the  tools,  machines, 
buildings,  and  other  things  which  aid  in  production.  Nobody 
would  make  such  things  unless  somebody  would  buy  and  pay 
for  them.  The  only  people  who  buy  and  pay  for  them  are  those 
who  save  and  invest,  who  buy  fewer  articles  of  consumption 
than  they  might  buy,  and  who  spend  the  money  thus  saved  for 
things  which  aid  in  production.  That  is  what  it  means  to 
save  and  invest. 


CHAPTER  XIV 

FORMS  OF  BUSINESS  ORGANIZATION 

Large  capital  necessary.  The  growth  of  machine  production 
is  the  result  of  mechanical  invention,  but  it  has,  in  turn,  made 
necessary  such  large  aggregations  of  capital  as  to  require  the 
combined  accumulations  of  numbers  of  men.  In  comparatively 
few  cases  does  a  single  individual  possess  enough  capital  to 
equip  a  modern  factory,  railroad,  steamship  company,  mine,  or 
even  a  large  mercantile  house.  Were  it  not  possible  to  combine 
the  capital  of  a  number  of  individuals,  large-scale  production 
would  be  the  privilege  of  only  a  few  very  wealthy  men. 

Methods  of  combining  capital.  There  are  three  distinct  meth- 
ods of  combining  capital :  one  is  known  as  the  partnership ; 
another  is  the  corporation,  or  joint-stock  company ;  and  the 
third  is  the  cooperative  society.  The  partnership  is  a  simple 
combination  of  two  or  more  individuals  in  the  ownership  and 
management  of  a  given  business,  in  which  each  partner  is  fully 
responsible  for  the  acts  and  liabilities  of  the  group.  The  part- 
nership is  merely  an  enlargement  of  the  individual.  The  in- 
dividual who  owns  and  operates  his  own  business  is,  of  course, 
fully  responsible  for  all  debts  and  obligations,  and,  subject  to 
bankruptcy  and  homestead  laws,  all  his  property  may  be  taken 
in  payment  of  any  obligation  incurred  in  the  business.  Where 
two  or  more  men  join  in  a  partnership  each  partner  is  respon- 
sible in  the  same  sense  and  to  the  same  extent  as  if  he  were 
the  sole  owner. 

Difficulties  of  partnership.  Obviously  a  partnership  on  these 
terms  is  possible  only  among  men  who  are  very  intimately 
acquainted  with  one  another  and  who  have  complete  confidence 
in  one  another.  Since  each  partner  is  fully  responsible  for  the 

213 


214  PRINCIPLES  OF  NATIONAL  ECONOMY 

acts  of  every  other,  it  would  be  extremely  hazardous,  not  to  say 
foolhardy,  for  anyone  to  form  a  partnership  with  an  individual 
with  whom  he  was  not  intimately  acquainted  and  concerning 
whose  honesty  and  solvency  he  had  the  slightest  suspicion.  In- 
competent or  dishonest  partners  have  caused  the  financial  ruin 
of  many  an  otherwise  sound  and  capable  business  man. 

The  corporation.  The  modern  expansion  of  business  would 
hardly  have  been  possible  without  some  form  of  organization 
which  would  permit  the  association  of  larger  numbers  of  men 
than  are  possible  under  a  partnership.  This  has  given  rise  to 
the  corporation,  or  the  joint-stock  company.  The  distinguish- 
ing difference  between  the  corporation  and  the  partnership  lies 
in  what  is  known  as  limited  liability.  In  a  corporation  the 
liability  of  each  shareholder  is  strictly  limited.  The  corpora- 
tion may  become  bankrupt,  but  the  individual  members  or 
shareholders  can  be  called  upon  only  for  definite  sums  to  make 
good  the  debts  of  the  corporation.  In  the  ordinary  case  each 
individual  puts  a  certain  sum  of  money  into  the  fund.  This 
may  be  lost,  but  he  cannot  be  called  upon  for  additional  sums  to 
make  good  further  losses.  In  other  cases,  such  as  our  national 
banks,  the  shareholder  may  not  only  lose  what  he  has  put  into 
the  fund  but  may  be  assessed  an  equal  amount  in  addition. 
This  is  sometimes  called  double  liability,  but  even  in  this  case 
the  shareholder's  liability  is  limited  and  his  whole  property  is 
not  hazarded  as  it  is  in  a  partnership. 

Suppose,  for  example,  it  were  considered  necessary  to  have 
Si 00,000  of  capital  with  which  to  start  a  business".  This 
capital  may  be  divided  into  a  thousand  shares  of  Sioo  each. 
( A  larger  number  of  shares  of  smaller  denomination  or  a  smaller 
number  of  larger  denomination  may,  of  course,  be  decided 
upon.)  These  shares  are  represented  by  bits  of  printed  paper 
which  serve  as  evidence  to  show  that  the  money  has  been  put 
into  the  fund.  A  thousand  different  individuals  may  buy  one 
share  each,  or  a  smaller  number  may  each  buy  a  different  num- 
ber of  shares.  For  each  Sioo  which  any  individual  puts  in  he 
receives  one  of  these  bits  of  paper,  which  have  come  to  be  called 


FORMS  OF  BUSINESS  ORGANIZATION  215 

shares,  or  stock  certificates,  or  some  other  such  name.  After  the 
shares  are  all  sold,  there  is  the  fund  of  Si 00,000  in  money  avail- 
able for  starting  the  business.  The  general  rule  is  that  each  con- 
tributor shall  have  a  vote  for  each  share  which  he  has  purchased. 
It  would,  therefore,  be  possible  for  one  individual  to  own  more 
than  half  the  shares,  provided  he  had  invested  more  than 
$50,000  in  the  enterprise.  Owning  more  than  half  the  shares, 
he  could  always  cast  the  majority  vote  and  control  the  corpora- 
tion, electing  himself  and  his  particular  friends  to  all  the 
offices  and  virtually  controlling  the  business.  In  some  cases, 
however,  such  a  concentration  of  ownership  is  not  permitted. 

Limited  liability.  Only  the  officers  of  the  corporation  are 
empowered  to  act  for  the  corporation ;  the  individual  share- 
holder who  is  not  an  officer  has  no  power  to  obligate  the 
corporation  in  any  way.  One  therefore  does  not  need  to  scruti- 
nize the  solvency  or  the  character  of  his  fellow  shareholders  as 
closely  as  would  be  necessary  in  a  partnership.  Again,  the 
individual  shareholder  has  no  responsibility  for  the  acts  of  the 
corporation  beyond  that  which  has  already  been  indicated ; 
that  is,  if  the  business  fails,  the  affairs  of  the  corporation  may 
be  wound  up,  but  he  can  lose  only  the  sum  which  he  originally 
subscribed,  or,  in  the  case  of  double  liability,  that  sum  plus 
an  equal  sum. 

Some  weaknesses  of  the  corporation.  This  device  of  the  joint- 
stock  company  with  limited  liability  has  made  possible  the 
aggregation  of  vast  sums  of  capital,  running  up  into  millions 
and  hundreds  of  millions  of  dollars,  for  the  purpose  of  carry- 
ing on  great  business  enterprises.  Individuals  who  never  saw 
or  heard  of  one  another,  living  in  different  parts  of  the  country, 
sometimes  in  different  parts  of  the  world,  may  own  shares  in 
the  same  corporation,  having  contributed  their  capital  to  the 
joint  fund  for  the  carrying  on  of  the  business.  This  has  been 
one  of  the  great  factors  in  building  up  all  modern  enterprise. 
It  is  almost  as  important  as  some  of  the  great  mechanical  in- 
ventions. But,  like  all  great  inventions,  it  carries  with  it 
certain  difficulties.  For  example,  it  has  made  individual  enter- 


216  PRINCIPLES  OF  NATIONAL  ECONOMY 

prise  a  practical  impossibility,  except  in  those  cases  where 
small-scale  production  is  as  efficient  as  large-scale  production. 
On  the  other  hand,  it  has  given  individuals  with  only  small 
sums  of  capital  to  invest  the  opportunity  to  participate  in  the 
profits  of  large-scale  production.  In  the  latter  sense  it  has  been 
a  democratic  institution.  The  fact,  however,  that  individuals 
vote  in  proportion  to  the  number  of  shares  which  they  own 
has  tended  to  destroy  some  of  the  democracy  and,  in  some  cases 
at  least,  to  put  the  management  of  the  corporation  into  the 
hands  of  a  plutocratic  oligarchy;  that  is,  a  few  large  stock- 
holders who  control  the  majority  of  the  stock  can  always 
control  the  corporation,  sometimes  to  the  disadvantage  of  the 
small  shareholders,  who  can  never  cast  a  majority  vote.  Vari- 
ous limitations  upon  the  voting  power  have  been  proposed  and 
introduced  for  the  purpose  of  curbing  the  rapacity  of  the  large 
shareholders.  In  spite  of  these,  however,  many  a  fortune  has 
been  built  up  through  the  machinations  of  large  shareholders 
and  the  robbing  of  small  shareholders. 

Multiplied  power  and  divided  responsibility.  Another  disad- 
vantage of  the  corporation  is  found  in  its  impersonal  character. 
A  decade  or  so  ago  the  social  psychologists  were  engaged  with 
the  problem  of  the  mob  mind.  Before  the  analysis  was  carried 
very  far  it  was  discovered  that  the  mob  mind  did  not  present 
any  special  mystery  as  distinct  from  the  individual  mind. 
The  mob  thinks  and  acts  as  any  of  its  individuals  would  think 
or  act,  were  his  power  greatly  increased  and  his  sense  of  respon- 
sibility greatly  diminished.  That  is  precisely  what  the  presence 
of  numbers  does  for  the  individual  when  the  totality  is  moved 
by  a  common  impulse — it  gives  him  a  sense  of  power  propor- 
tionate to  the  numbers,  and  at  the  same  time  the  very  fact  of 
numbers  diminishes  his  own  sense  of  responsibility.  That  is 
why  the  mob  is  so  like  a  monster,  for  the  difference  between  a 
man  and  a  monster  is  precisely  that, — the  monster  feels  a  sense 
of  power  but  lacks  a  sense  of  responsibility. 

Something  of  the  kind  exists  in  the  case  of  the  industrial 


FORMS  OF  BUSINESS  ORGANIZATION  217 

'corporation.  There  also  you  have  increased  power  and  dimin- 
ished responsibility.  The  sense  of  power  comes  not  so  much 
from  the  presence  of  numbers — as  in  the  case  of  the  mob — as 
from  the  larger  fund  of  competitive  capital  which  is  brought 
together.  The  diminished  sense  of  responsibility  comes  partly 
from  the  mere  fact  of  numbers  (no  individual  member  of  the 
corporation  feels  the  full  responsibility  for  the  acts  of  the 
whole),  partly  from  the  impersonal  character  of  the  conduct 
of  the  corporation,  and  partly  from  the  limited-liability  feature 
of  most  of  the  charters.  Most  of  the  evils  of  corporation  prac- 
tice grow  out  of  this  simple  situation,  and  the  remedy  must  be 
applied  at  this  point.  The  sense  of  responsibility  must  be  made 
commensurate  with  the  sense  of  power. 

This  is  to  be  accomplished  not  by  reducing  the  powers  of 
corporations  so  much  as  by  increasing  the  sense  of  responsi- 
bility of  its  individual  members.  If  they  can  be  made  to  feel 
the  same  responsibility  for  the  acts  of  the  corporation  which 
they  feel  for  their  individual  acts,  the  corporation  problem  as 
such  will  be  solved ;  and  it  will  be  solved  in  no  other  way.  This 
means  the  frank  adoption  of  the  maxim  that  crime  is  always 
personal  and  that  corporate  law-breaking  is  to  be  dealt  with  in 
precisely  the  same  way  as  individual  law-breaking. 

Size  a  matter  of  importance.  In  fact,  it  may  be  necessary  to 
go  even  farther  and  enforce  stricter  responsibility  upon  members 
of  corporations — particularly  the  larger  corporations — than 
we  do  upon  individuals.  If  the  principle  we  have  laid  down  is 
sound,  it  furnishes  no  support  to  the  view  that  the  mere  bigness 
of  a  corporation  is  not  a  matter  for  the  law  to  take  into  account. 
From  our  point  of  view  bigness  is  an  important  factor  in  the 
problem ;  for  the  bigger  the  corporation,  the  greater  its  power 
and  the  less  the  sense  of  responsibility  on  the  part  of  each 
member.  This  situation  alone  calls  increasingly  for  strict 
regulation  and  enforcement  of  responsibility,  the  bigger  the 
corporation  becomes.  Its  increased  power  is  a  good  thing,  pro- 
vided that  power  be  used  productively  and  not  acquisitively; 


218  PRINCIPLES  OF  NATIONAL  ECONOMY 

but  there  is  no  certainty  that  it  will  be  used  productively  unless 
subjected  to  the  strictest  control. 

This  does  not  mean  that  large  corporations  have  worse  dis- 
positions than  small  ones  or  that  their  members  are  meaner  men 
than  the  members  of  small  corporations.  It  means  only  that 
the  disproportion  between  power  and  responsibility  increases 
with  the  size  of  the  corporation. 

As  a  homely  illustration  let  us  take  the  common  house  cat, 
whose  diminutive  size  makes  her  a  safe  inmate  of  our  household 
in  spite  of  her  playful  disposition  and  her  liking  for  animal 
food.  If,  without  the  slightest  change  of  character  or  disposi- 
tion, she  were  suddenly  enlarged  to  the  dimensions  of  a  tiger, 
we  should  at  least  want  her  to  be  muzzled  and  to  have  her  claws 
trimmed ;  whereas  if  she  were  to  assume  the  dimensions  of  a 
mastodon,  I  doubt  whether  any  of  us  would  want  to  live  in  the 
same  house  with  her.  And  it  would  be  useless  to  argue  that  her 
nature  had  not  changed — that  she  was  just  as  amiable  as  ever, 
and  no  more  carnivorous  than  she  always  had  been.  Nor  would 
it  convince  us  to  be  told  that  her  productivity  had  greatly  in- 
creased and  that  she  could  now  catch  more  mice  in  a  minute 
than  she  formerly  could  in  a  week.  We  should  be  afraid  lest, 
in  a  playful  mood,  she  might  set  a  paw  upon  us,  to  the  detri- 
ment of  our  epidermis,  or  that  in  her  large-scale  mouse-catching 
she  might  not  always  discriminate  between  us  and  mice. 

Stratification  of  society.  There  is  another  problem,  not 
strictly  a  corporation  problem  but  a  social  problem,  growing 
out  of  the  prevalence  of  the  corporate  form  of  industrial  organ- 
ization ;  that  is,  the  problem  of  the  widening  gap  between  em- 
ployers and  employed,  or,  more  strictly,  between  capitalists  and 
laborers.  It  may  be  laid  down  as  a  general  social  law  that 
anything  which  separates  people  into  sharply  distinguishable 
groups — whether  it  be  a  geographical  boundary,  a  racial  differ- 
ence, a  difference  of  religious  creeds,  or  a  class  distinction — 
will  produce  between  the  groups  thus  separated,  first,  ignorance 
of  one  another,  then  suspicion  growing  out  of  that  ignorance, 


FORMS  OF  BUSINESS  ORGANIZATION  219 

then  misunderstanding  growing  out  of  that  ignorance  and  sus- 
picion, and,  finally,  open  warfare  whenever  a  pretext  is  found ; 
whereas  anything  which  bridges  over  these  gaps,  or  brings  peo- 
ple together  regularly  and  normally,  creates,  first,  knowledge  of 
one  another,  then  confidence  instead  of  suspicion,  then  under- 
standing instead  of  misunderstanding,  and,  finally,  lasting  peace 
because  no  difficulty  seems  large  enough  to  serve  as  a  pretext 
for  war. 

Now  the  joint-stock  form  of  organization,  though  a  most 
effective  industrial  device,  has  had  at  least  one  serious  social 
result:  it  has  widened  somewhat  the  gap  which  would  other- 
wise have  existed  between  the  employing  group  and  the  em- 
ployed group.  When  employers  are  known  by  their  personality 
and  can  come  into  some  kind  of  personal  or  direct  contact  with 
employees  and  when,  therefore,  employer  and  employee  know 
something  about  one  another,  there  can  be  no  such  degree  of 
suspicion  of  one  another  as  now  exists ;  where  ignorance  dis- 
appears, suspicion  tends  to  disappear  also.  But  when  employ- 
ers stand,  as  the  shareholders  of  a  corporation,  in  a  purely 
impersonal  relation  to  employees, — when  the  average  employer 
or  shareholder  knows  nothing  personal  about  the  employees 
of  the  corporation  and  the  employees  know  absolutely  noth- 
ing personal  about  the  shareholding  employers, — there  is  on 
either  side  of  the  line  about  as  great  a  degree  of  ignorance 
of  those  on  the  other  side  as  can  be  found  anywhere  in  modern 
social  life. 

Widening  the  gap  between  social  classes.  The  gap  which  sep- 
arates the  two  groups  is  made  so  wide  as  to  produce  very  much 
the  same  result  as  is  produced  by  a  difference  of  color  between 
races  or  a  difference  of  religion  between  two  sharply  contrasted 
religious  groups.  Such  a  state  of  things  has  never  failed  in  the 
history  of  the  world  to  produce  suspicion,  jealousy,  misunder- 
standing, and,  on  the  slightest  pretext,  open  hostility ;  and,  so 
far  as  we  are  able  to  see  into  the  future,  there  is  not  the  slightest 
ground  for  hoping  that  such  a  condition  will  ever  fail  to  pro- 


220  PRINCIPLES  OF  NATIONAL  ECONOMY 

duce  these  same  undesirable  results.  In  other  words,  we  need 
not  hope  for  social  peace  or  for  any  cessation  of  the  conflict  of 
classes  until  that  chasm  is  in  some  way  bridged  over  or  made 
to  disappear. 

This  result  can  hardly  be  achieved  by  doing  away  with  joint- 
stock  corporations, — they  are  too  effective  as  industrial  devices 
to  make  such  a  program  tolerable.  But  if  we  are  ever  to  have 
anything  resembling  social  peace,  some  way  must  be  found  to 
bring  the  employing  classes  and  the  employed  into  personal 
relationship  one  with  another.  The  ideal  is  undoubtedly  that 
of  having  the  workers  in  our  industrial  establishments  become 
also  owners  of  the  stock  of  the  corporation.  If  that  result  could 
possibly  be  achieved,  there  would  be  an  end  of  the  present 
phase  of  warfare. 

How  this  is  to  be  achieved  is  another  question.  It  will  never 
be  achieved  until  our  corporation  laws  and  our  judicial  pro- 
cedure relating  to  corporations  are  made  efficient  enough  to 
make  it  a  safe  venture  for  a  man  of  small  means  to  buy  a  share 
in  an  industrial  corporation.  So  long  as  these  things  are  so  in- 
efficient as  to  enable  large  shareholders  and  rings  to  "freeze 
out"  the  small  shareholders,  or  in  any  way  to  make  it  hazardous 
for  a  man  of  small  means — such  as  the  average  workingman — 
to  invest  in  a  share,  it  will  never  be  accomplished.  This  looks 
like  a  legal  problem  rather  than  a  legislative  problem,  and  it  is 
for  the  legal  fraternity  and  the  courts  to  solve. 

The  trust.  It  is  important  that  we  distinguish  between  the 
corporation,  as  we  have  just  described  it,  and  the  trust,  or  com- 
bine. The  corporation  is  an  organization  of  individuals  who 
put  their  capital  together  in  order  to  carry  on  a  business  which 
requires  more  capital  than  is  likely  to  be  possessed  by  any  one 
of  them.  The  trust,  or  combine,  is  mainly  an  organization  of 
corporations  (though  it  may  include  also  a  few  individual  capi- 
talists) for  the  purpose  of  controlling  the  market.  While  such 
organizations  are  to  be  distinguished  sharply  from  corporations 
as  such,  nevertheless  they  could  scarcely  have  come  into  ex- 


FORMS  OF  BUSINESS  ORGANIZATION  221 

istence  if  the  corporation  had  not  preceded  them  and  prepared 
the  way.  They  may  therefore  be  called  extreme  developments 
of  the  corporation  idea,  though  not  necessary  developments. 
As  to  these  extreme  developments  of  the  corporation  principle, 
it  is  becoming  more  and  more  apparent  that  their  power  for 
evil  lies  wholly  in  their  power  of  controlling  and  manipulating 
prices.  If  that  power  could  be  taken  out  of  their  hands,  we 
should  then  have  nothing  to  fear  from  them. 

Control  of  prices.  If  they  could  not  succeed  in  competition 
through  their  power  over  prices,  they  could  then  succeed  only 
through  their  power  of  production.  If  they  should  then  sur- 
vive, the  mere  fact  of  their  survival  would  prove  their  fitness 
to  survive.  This  has  been  pointed  out  many  times  by  scholars, 
but  the  practical  politicians,  with  their  unerring  instinct  for 
the  wrong  way,  have  ignored  it  and  have  been  trying  various 
hard  and  useless  methods  of  dealing  with  the  problem.  Even- 
tually, after  having  tried  every  possible  way  of  going  wrong, 
we  shall  apply  the  simple  and  direct  remedy  of  government 
control  of  prices  wherever  a  monopoly  exists. 

It  is  not  necessary  to  indulge  in  any  sentimental  rhapsodies 
on  the  subject  of  the  people  and  their  control  over  affairs  of  this 
kind.  Government  affairs  are  controlled  by  politicians,  and 
politicians  are  no  more  interested  in  the  people  than  are  the 
trust  magnates  themselves.  The  choice  is  a  hard  one.  But 
where  competition  fails  to  regulate  prices,  these  prices  are  go- 
ing to  be  fixed  arbitrarily  by  someone.  In  the  absence  of  gov- 
ernment control  they  are  fixed  by  the  trust  operators  alone. 
Where  there  is  government  control  they  are  fixed  by  the  joint 
action  of  the  politicians  and  the  trust  operators.  Their  inter- 
ests are  not  the  same ;  and,  as  the  result  of  their  pulling  and 
hauling,  prices  will  not  be  fixed  quite  so  completely  in  the  in- 
terest of  the  trusts  but  more  in  the  interest  of  the  trusts  and 
the  politicians.  Since  the  people  can  control  the  trusts  after  a 
fashion  by  refusing  to  buy  from  them,  and  the  politicians  after 
a  fashion  by  refusing  to  vote  for  them,  it  will  happen  that 


222  PRINCIPLES  OF  NATIONAL  ECONOMY 

through  this  double  control  the  interests  of  the  people  will  be 
somewhat  better  safeguarded  than  they  are  now. 

Incidentally  this  would  destroy  most  of  the  trusts.  No  trust 
exists  by  virtue  of  its  superior  productive  powers.  Each  one 
depends  for  its  existence  upon  its  superiority  in  buying  and  sell- 
ing ;  that  is,  upon  its  power  over  prices.  Take  away  this  power 
and  enable  the  outside  concerns  to  match  their  productivity 
against  that  of  the  trust,  and  outside  competition  will  increase, 
forcing  the  trust  to  break  up  into  its  most  efficient  productive 
units,  as  distinguished  from  the  most  efficient  bargaining  units. 

The  cooperative  society.  It  has  often  been  proposed  to  sub- 
stitute a  radically  different  form  of  business  organization  for 
the  corporation,  or  joint-stock  company.  This  is  known  as  the 
cooperative  society.  In  a  sense  the  corporation  itself  is  coopera- 
tive, but  it  differs  from  the  cooperative  society  in  two  funda- 
mental characteristics :  In  the  first  place,  the  corporation 
involves  cooperation  among  the  owners,  whereas  a  genuine 
cooperative  society  involves  cooperation  among  the  workers. 
In  the  discussion  of  the  corporation  it  was  pointed  out  that  the 
rise  of  modern  industrial  conditions  had  brought  about  a  sharp 
separation  of  owners  and  workers.  In  the  original  form  of 
manufacturing  (that  is,  the  small  shop,  where  the  workman 
owned  the  shop  and  the  tools)  we  had  the  functions  of  owner- 
ship and  of  labor  combined  in  the  same  individual.  With  the 
rise  of  the  factory  system  these  two  functions  were  separated. 
The  corporation  represents  the  organization  of  owners  and 
maintains  the  separation  of  owners  from  workers.  The  coopera- 
tive society,  on  the  other  hand,  represents  an  association  of 
workers.  Under  the  corporation,  ownership  and  management 
go  together ;  under  the  cooperative  society,  labor  and  manage- 
ment go  together.  In  the  second  place,  in  a  corporation,  as  we 
have  seen,  the  various  individuals  who  contribute  capital  vote 
in  proportion  to  the  number  of  shares  which  they  own.  In  a 
cooperative  society  each  individual  has  one  vote,  regardless  of 
the  number  of  shares  which  he  owns  or  the  amount  of  capital 
which  he  has  put  in.  One  man  one  vote  is  the  rule  here,  where- 


FORMS  OF  BUSINESS  ORGANIZATION  223 

as  one  share  one  vote  is  the  rule  of  the  corporation.  It  is  in- 
accurate, however,  to  say  that  capital  votes  in  a  corporation. 

As  to  the  comparative  merits  of  these  two  forms  of  organ- 
ization, the  opinion  of  the  world  is  somewhat  divided.  It  must 
be  admitted  that  the  corporation  has  had  much  the  larger 
growth,  though  in  recent  years  the  cooperative  society  has  been 
gaining  ground  rapidly. 

Comparative  merits  of  the  corporation  and  the  cooperative 
society.  It  is  the  opinion  of  the  present  writer  that  the  question 
will  always  be  decided  on  rather  definite  economic  grounds. 
Where  the  difficult  problem  is  that  of  getting  sufficient  capital, 
he  who  supplies  the  capital  must  be  placated ;  that  is  to  say, 
where  everything  else  is  easily  obtainable,  where  there  are  al- 
ways plenty  of  laborers  seeking  employment,  plenty  of  raw 
material  to  be  had,  and  buyers  ready  to  buy  the  finished  prod- 
uct, but  where  the  limiting  factor  is  capital  and  the  puzzling 
thing  is  to  know  where  to  get  it,  favorable  terms  must  be  offered 
to  the  capitalist  and  he  must  be  allowed  to  have  his  way,  or 
the  capital  cannot  be  secured.  In  the  early  stages  of  manufac- 
turing expansion,  capital  was  the  limiting  factor. 

The  limiting  factor  will  dominate.  Now  and  then  conditions 
arise  under  which  capital  is  not  the  limiting  factor.  Among 
farmers,  for  example,  where  a  creamery  is  needed,  it  is  never 
very  difficult  to  raise  capital  to  equip  the  creamery ;  the  diffi- 
culty is  to  get  business, — that  is,  to  get  the  farmers  to  produce 
the  milk  and  sell  the  cream  to  the  creamery.  In  these  cases  the 
producer  of  milk  must  be  placated  and  persuaded  to  join  the 
organization.  He  must,  therefore,  be  given  control.  This  gives 
rise  to  what  is  known  as  the  cooperative  creamery,  in  which 
the  producing  farmers  own  the  plant,  direct  its  management, 
and  share  in  its  profits.  Such  a  creamery,  however,  is  coopera- 
tive only  in  a  special  sense.  The  men  who  work  in  the  creamery 
are  employed  as  other  laborers  would  be  employed  in  a  pri- 
vately owned  factory  of  any  kind.  A  cooperative  store  is  like- 
wise dependent  upon  custom.  It  is  easier  to  get  capital  and  to 
hire  clerks  and  salesmen  than  it  is  to  induce  people  to  trade  at 


224  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  store.  Therefore  the  patrons  of  the  store  must  be  placated 
and  given  control.  The  great  cooperative  societies,  as  pointed 
out  in  the  chapter  on  Competition,  have  been  societies  where 
cooperative  buying  and  selling  has  been  substituted  for  compet- 
itive buying  and  selling.  That  is,  they  have  been  mercantile  so- 
cieties. They  do  not  represent  cooperation  among  producers  or 
among  the  workers  in  the  stores  and  factories,  for  the  workers 
in  the  stores  and  factories  are  hired  on  the  same  terms  as 
workers  in  the  privately  owned  or  corporation-owned  stores 
and  factories ;  in  short,  they  are  not  examples  of  pure  coopera- 
tion but  of  quasi  cooperation ;  that  is,  they  are  cases  of  coop- 
erative buying  or  selling  among  independent  producers  and  not 
of  cooperative  production. 

There  are  a  few  cases  of  real  cooperation,  but  they  are  not 
very  conspicuous.  The  only  real  cooperation  is  that  which 
obtains  among  workers,  where  the  men  who  do  the  work  in  a 
factory  manage  it  themselves  or  direct  its  management  and  fur- 
nish or  hire  the  capital.  This  form  of  cooperation  has  not  yet 
proved  very  successful,  mainly  because  labor  has  seldom  been 
the  limiting  factor.  It  is  generally  so  easy  to  get  labor  that  the 
laborer  does  not  have  to  be  placated  and  given  much  control. 
When  the  time  comes,  as  it  probably  will,  that  labor  is  scarce 
and  hard  to  find, — when  it  is  necessary  to  placate  the  laborer 
rather  than  the  capitalist  or  the  purchaser  of  finished  products, 
—  then  we  may  expect  that  this  form  of  cooperation  will  gain 
ground.  If  the  laborer  has  to  be  placated  in  order  to  induce 
him  to  work  in  an  establishment,  he  will  be  given  more  and 
more  control  over  it. 

Control  by  the  indispensable  person.  Generally  speaking,  the 
indispensable  man,  whether  he  be  the  one  who  furnishes  capital, 
the  one  who  furnishes  raw  material  (as  in  the  case  of  the 
cooperative  creamery),  the  one  who  buys  the  finished  product 
(as  in  the  case  of  the  cooperative  store),  or  the  one  who  sup- 
plies the  labor  (as  in  the  case  of  the  true  cooperative  society), 
is  in  so  strong  a  position  that  he  can  dictate  terms  to  all  the 
others.  When  the  laborer  becomes  indispensable  (that  is,  so 


FORMS  OF  BUSINESS  ORGANIZATION  225 

scarce  and  hard  to  find  that  the  average  business  enterprise 
must  wait  on  his  will)  he  will  be  in  so  strong  a  position  that  he 
can  dictate  terms  to  all  the  others  who  participate  in  the  enter- 
prise. He  will  then,  without  resort  to  force,  really  direct 
its  management  on  a  purely  voluntary  and  contractual  basis. 
There  is  not  a  very  good  prospect  for  cooperation  among  labor- 
ers under  any  other  conditions.  There  is  a  strong  probability 
that,  with  the  rapid  accumulation  of  capital  (especially  if  habits 
of  frugality  and  saving  are  encouraged)  and  with  the  growing 
scarcity  of  labor  (especially  if  wise  immigration  laws  are  passed 
and  a  high  standard  of  living  among  laborers  is  encouraged), 
there  will  come  a  time  when  capital  will  be  almost  superfluous 
because  of  its  great  abundance,  and  every  individual  laborer 
will  become  almost  indispensable  because  of  the  scarcity  of 
labor.  Then  we  must  expect  that  capital  will  lose  the  power  to 
direct  the  management  of  industries  and  will  take  the  position 
of  a  hireling.  The  laborer  will  then  gain  control  and  assume  the 
position  of  the  master.  This  mastery,  however,  will  not  be  ac- 
quired by  force,  unless  we  lapse  into  savagery.  It  will  be  ac- 
quired as  a  logical  result  of  the  fact  that  the  individual  laborer, 
instead  of  being  superfluous  and  easily  spared,  as  is  the  case 
when  labor  is  oversupplied,  has  become  either  indispensable  or 
difficult  to  spare  because  of  the  scarcity  of  laborers.  By  volun- 
tary agreement  in  the  free  and  open  market  he  can  then  get  his 
full  share  of  the  control  of  industry. 


ECONOMICAL  USE  OF  LABOR  ON  LAND 

Product  per  acre  and  product  per  laborer.  The  economical 
use  of  land  presents  two  somewhat  distinct  but  closely  related 
problems :  first,  the  economical  use  of  labor  on  land ;  second, 
the  economizing  of  land  itself.  The  first  problem  is  that  of 
so  managing  labor  on  land  as  to  get  the  maximum  product  per 
unit  of  labor ;  the  other  is  that  of  so  handling  the  land  as  to 
get  the  maximum  product  per  acre.  In  a  country  where  there 
is  an  abundance  of  land  still  unused  and  of  good  quality,  the 
first  is  the  only  problem  of  immediate  importance.  In  an  older 
and  more  densely  populated  country,  where  land  is  becoming 
scarce,  the  second  problem  rises  to  importance.  Even  in  the 
latter  case,  however,  the  main  problem  is  always  that  of  getting 
the  maximum  product  per  unit  of  the  population.  It  is  this 
which  will  give  the  maximum  average  well-being  for  the  pop- 
ulation. But  if  land  is  strictly  limited  and  very  scarce,  a 
large  product  per  acre  is  absolutely  necessary  in  order  that 
there  may  be  the  maximum  product  per  unit  of  the  population. 

What  does  "land"  include  ?  In  most  economic  discussions 
the  word  "land"  is  used  to  include  all  natural  agents, — forests, 
waterfalls,  minerals,  and  everything  else  provided  by  nature 
for  man's  occupation  and  use.  But  under  our  legal  system  the 
ownership  of  a  piece  of  land  or  a  section  of  the  earth's  surface 
carries  with  it  the  use  of  the  air  above  it,  the  sunlight  that  falls 
upon  it,  the  rain,  the  dew,  and  everything  else  that  cannot  be 
separated  from  it.  In  some  cases  this  ownership  includes  the 
minerals  that  lie  beneath  the  surface. 

Colonizing.  The  problem  of  getting  the  most  out  of  these 
natural  resources  with  the  prevailing  supply  of  labor  is  one  of 

226 


ECONOMICAL  USE  OF  LABOR  ON  LAND  227 

the  most  important  of  all  questions  of  national  economy.  The 
problem  of  getting  the  maximum  product  per  unit  of  labor  has 
been  discussed  in  the  preceding  chapters  under  such  headings 
as  The  Division  of  Labor,  The  Use  of  Power,  The  Use  of  Capi- 
tal, and  Forms  of  Business  Organization.  There  are  many  other 
methods,  however,  by  which  the  product  per  unit  of  labor  may 
be  increased.  Among  these  must  be  mentioned  that  of  terri- 
torial expansion  of  the  population  or  the  sending  out  of  colo- 
nies. This  is  a  means  by  which  more  land  is  made  available 
for  the  existing  population  than  would  be  the  case  if  it  did  not 
expand  or  colonize. 

It  is  probably  no  accident  that  every  great  race  has  been  a 
colonizing  race.  There  is  no  reason  to  believe,  however,  that 
it  was  the  colonization  that  made  it  a  great  race,  rather  than 
that  the  greatness  of  the  race  enabled  it  to  colonize.  A  great 
race  must  be  made  up  of  vigorous  and  efficient  people.  Such 
people  are  likely  to  succeed  wherever  they  go.  They  make  suc- 
cessful colonists,  for  the  simple  reason  that  when  they  emigrate 
and  come  into  competition  with  other  races  they  are  more  than 
likely  to  succeed  in  that  competition.  Having  great  physical  vigor 
and  energy,  a  high  degree  of  mentality,  considerable  knowledge 
of  and  control  over  the  forces  of  nature,  and  a  temperamental 
development  that  enables  them  to  work  together  efficiently, 
they  are  very  likely  to  succeed  in  competition  with  outlying 
races.  If  in  addition  to  this  they  waste  less  of  their  energy  in 
distrust  and  suspicion  of  one  another,  if  they  have  a  keener 
sense  of  justice  and  no  disposition  to  sacrifice  the  interests  of 
society  for  the  weak  and  inefficient,  such  people  may  easily 
spread  over  outlying  lands,  buy  them  from  the  natives,  and 
succeed  by  virtue  of  their  superior  mastery  of  the  arts  of  pro- 
duction. On  the  other  hand,  the  members  of  a  weak  race  are 
not  uniformly  successful  when  they  emigrate  and  come  into 
contact  with  other  peoples.  Such  individuals  incline  to  stay  at 
home,  where  they  can  protect  themselves  by  special  political 
and  legal  institutions  against  the  competition  of  outside  peoples. 
The  surplus  population,  instead  of  moving  out  and  colonizing 


228  PRINCIPLES  OF  NATIONAL  ECONOMY 

those  sections  of  the  earth  where  its  labor  would  be  most  pro- 
ductive, remains  within  the  confines  of  its  own  country  and 
tends  to  overpopulate  that  territory. 

Expanding  and  pent-up  civilizations.  This  difference  in  the 
characteristics  of  the  members  of  different  races  will  explain 
two  very  different  types  of  civilization,  one  of  which  may  be 
called  the  expanding  type  and  the  other  the  pent-up  type. 
Under  the  expanding  type  of  civilization  the  people  spread  out. 
They  go  where  the  natural  opportunities  for  the  productive  use 
of  labor  are  greatest.  They  are  vigorous  and  capable  enough  to 
be  willing  to  take  their  chances  anywhere  in  competition  with 
members  of  any  other  race.  Under  the  pent-up  type  of  civili- 
zation the  people  incline  to  keep  within  the  boundaries  of  their 
own  country  or  their  own  neighborhoods,  where  they  enjoy  at 
least  some  protection  from  outside  competition  or  have  some 
little  outward  advantage  to  help  to  balance  the  disadvantages  of 
their  own  individual  weaknesses  or  inefficiency.  A  country 
populated  by  such  people  generally  tends  to  become  overpopu- 
lated  and  to  maintain  a  very  low  standard  of  living.  In  such  a 
country  the  death  rate  eventually  rises  to  balance  the  birth 
rate,  or  else  the  birth  rate  falls  to  balance  the  death  rate. 

Expanding  the  indoor  industries.  When  the  people  of  a  coun- 
try are  too  far  advanced  in  civilization  to  be  willing  to  acquire 
new  lands  by  military  conquest  or  to  force  themselves  as  colo- 
nists upon  other  countries  unwilling  to  receive  them,  and  are 
therefore  unable  to  acquire  any  new  land,  one  of  the  most 
important  of  all  questions  is  that  of  economizing  the  land  al- 
ready in  their  possession.  One  way  of  accomplishing  this  is  to 
turn  from  the  industries  that  require  much  land  in  proportion 
to  the  product  to  those  industries  that  require  little  land.  A 
mechanically  expert  nation  may  turn  to  the  manufacturing  in- 
dustries, bringing  the  products  of  land  from  distant  countries 
where  land  is  still  abundant,  working  them  over  in  the  factories 
at  home,  and  selling  the  finished  products  again  to  other  outside 
people.  By  this  process  a  country  can  support  a  vast  population 
for  which  its  own  land  would  not  provide  food  enough.  This 


ECONOMICAL  USE  OF  LABOR  ON  LAND  229 

method,  however,  is  always  more  or  less  hazardous  because  of 
the  possibility  of  a  cutting  off  of  its  sources  of  raw  materials  or 
of  the  market  for  its  finished  products.  A  country  is  in  a  much 
safer  position  if  it  can  so  utilize  its  land  as  to  support  its 
population  from  the  products  of  its  own  soil. 

Making  better  use  of  soil.  In  most  countries,  especially  in  the 
United  States,  the  soil  itself  is  by  far  the  greatest  physical 
resource.  The  products  of  the  soil  exceed  in  value  many  times 
those  of  the  mines  and  the  fisheries.  Besides,  if  the  soil  is 
properly  treated  it  may  continue  producing  its  wealth  and  main- 
taining its  population  for  indefinite  periods  of  time. 

One  of  the  first  methods  of  securing  a  more  economical  use 
of  the  land  of  a  country  is  that  which  is  generally  known  as 
reclamation ;  that  is,  the  bringing  into  use  of  land  hitherto  unfit 
for  cultivation.  The  methods  of  reclamation  are  determined 
chiefly  by  the  kinds  of  waste  land  or  the  reasons  why  the 
land  has  been  unfit  for  cultivation.  These  reasons  are  in  the 
main  as  follows :  1 

f  Too  stony 

Bad  physical  conditions  -j  Too  wet 
I  Too  dry 


CAUSES  OF 
WASTE  LAND 


Bad  chemical  conditions 


Too  much  acid 
Too  much  alkali 


„    ,       .  .         ...        f  Bad  taxation 
.  Bad  social  conditions  4  „ 

I  Too  much  speculation 

Causes  of  waste  land.  If  all  the  land  of  a  country  were  once 
brought  under  cultivation,  there  would  be  no  way  of  economiz- 
ing it  except  by  making  each  acre  produce  more.  But  this 
is  a  condition  which  has  probably  never  been  reached  in  any 
country,  certainly  not  in  the  United  States.  Therefore  we 
have  first  to  consider  the  question  of  bringing  waste  lands 
into  use.  Let  us  assume  that  the  country  is  all  "settled" ;  that 
is,  that  the  population  has  increased  and  spread  until  all  the 
land  which  is  sufficiently  productive  to  attract  cultivators  has 

1  Compare  the  author's  work,  "Principles  of  Rural  Economics,"  pp.  132  et  seq. 
Ginn  and  Company,  Boston. 


230  PRINCIPLES  OF  NATIONAL  ECONOMY 

actually  been  appropriated.  In  this  case  the  existence  of  waste 
land  will  be  due  to  one  or  more  of  three  causes :  ( i )  bad  physi- 
cal conditions,  (2)  bad  chemical  conditions,  (3)  bad  political 
conditions. 

Bad  physical  conditions.  There  are  many  physical  conditions 
which  might  be  described  as  bad,  any  of  which  would  tend  to 
make  land  unattractive  to  cultivators  and  therefore  to  cause  it 
to  go  to  waste.  There  are,  however,  three  characteristic  condi- 
tions which  cause  considerable  quantities  of  land  of  three  differ- 
ent types  to  go  to  waste.  These  are  represented  by  the  lands 
described  above  as  (i)  too  stony,  (2)  too  wet,  (3)  too  dry. 

Stony  land.  In  the  North  Atlantic  states  of  the  United  States 
the  first  of  these  conditions  is  the  most  conspicuous  of  the  causes 
of  waste  land ;  that  is,  most  of  the  waste  land  is  too  stony, 
though  there  are  some  swamps  there  also.  Along  the  southern 
seaboard  and  the  Gulf  coast  the  second  of  these  conditions  is 
the  most  conspicuous ;  that  is,  most  of  the  waste  land  is  too 
wet,  though  there  are  occasional  patches  of  stony  ground.  But 
over  a  vast  area  in  the  Far  West,  comprising  fully  a  third  of  the 
entire  area  of  the  United  States,  the  land  is  too  dry,  and  much 
of  it  goes  to  waste  on  that  account.  There  is  enough  of  this  land 
to  support  an  empire,  were  it  not  for  the  absence  of  the  one 
missing  factor, — water.  The  early  settlers  in  the  eastern  half 
of  this  country  found  another  condition  which  gave  them  a 
great  deal  of  trouble,  namely,,  the  presence  of  forests  which  had 
to  be  cleared ;  but  this  is  not  a  condition  which  creates  a  prob- 
lem for  the  rural  economist  today.  In  fact  it  is  now  much 
more  of  a  problem  to  preserve  our  forests  than  to  find  ways  of 
clearing  the  land  of  them. 

Of  the  land  which  is  now  going  to  waste  because  of  its  rocky 
condition,  much  of  it  is  so  exceedingly  rocky  as  to  make  it 
forever  useless  as  plowland  or  even  for  pasture.  It  would  cost 
so  much  to  clear  it  of  stones  that  one  could  never  hope  to  secure 
sufficient  returns  to  repay  the  cost.  Such  land,  however,  need 
not  go  to  waste.  It  is  our  natural  forest  land.  With  the  growth 
of  population  the  demand  for  timber  continues  to  increase,  and 


ECONOMICAL  USE  OF  LABOR  ON  LAND  231 

with  the  clearing  of  the  virgin  forests  the  supply  continues  to 
diminish.  The  time  is  not  far  distant  when  the  products  of  the 
forest  will  be  in  such  demand  as  to  make  even  the  rockiest  of 
our  hill  lands  valuable,  provided  they  have  been  allowed  to  grow 
up  to  trees. 

This  does  not  mean  that  these  rocky  hills  are  better  for  trees 
than  are  the  more  level  and  tillable  lands  of  the  valleys  and 
plains.  But  the  latter  lands  can  be  used  for  the  growing  of 
field  and  garden  crops,  whereas  the  rocky  hills  cannot.  It  is  a 
wise  economy,  therefore,  to  devote  these  hills  to  the  one  purpose 
for  which  they  are  suited,  reserving  the  tillable  lands  for  other 
purposes.  Besides  the  timber,  these  rocky  and  semimountain- 
ous  lands  are  of  some  value  as  deer  parks  and  game  preserves. 
The  supply  of  venison  and  other  game  which  such  lands  will 
furnish,  while  of  small  value  in  comparison  with  the  products 
of  rich  pastures  devoted  to  the  growing  of  domestic  animals,  is 
not  a  matter  to  be  despised,  especially  when  we  consider  that  it 
produces  itself  without  cost  in  the  way  of  labor  or  care. 

One  difficulty  in  the  way  of  the  full  utilization  of  land  of 
this  description  for  purposes  of  forestry  is  the  slowness  with 
which  returns  come  in.  It  takes  at  least  thirty  years,  more 
frequently  fifty  years,  for  a  tree  to  grow  to  a  usable  size.  -  So 
long  a  period  of  waiting  is  unattractive  to  the  average  individ- 
ual, partly  because  of  the  limited  span  of  human  life  and  partly 
because  of  the  shortness  of  human  foresight.  Another  difficulty 
lies  in  the  fact  that  the  work  of  reforesting  the  rocky  lands,  to 
be  effective,  must  be  carried  out  on  a  considerable  scale.  This 
seems  to  call  naturally  for  state  and  government  enterprise. 
Since  governments  do  not  need  to  count  on  a  natural  death, 
they  need  not  be  deterred  by  the  long  period  of  waiting  involved 
in  forestry.  A  half  century  or  even  a  century  is  not  too  long  for 
a  government  to  wait  for  returns,  provided  they  are  desirable. 

The  reclamation  of  stony  land  in  this  country  has  hitherto 
been  mainly  a  matter  of  private  enterprise.  The  individual 
farmer  on  such  land  has  with  his  own  labor,  or  at  least  under  his 
own  management,  done  the  work  of  clearing. 


232  PRINCIPLES  OF  NATIONAL  ECONOMY 

Wet  land.  The  problem  of  reclaiming  wet  land  has  attracted 
more  public  attention,  and  much  more  has  been  done  by  public 
enterprise  in  this  direction  than  in  the  reclaiming  of  stony  land. 
There  are  several  reasons  for  this.  In  the  first  place,  drainage 
operations  sometimes  have  to  be  carried  on  over  a  considerable 
area  in  order  to  find  a  suitable  outlet.  These  large  areas  are 
frequently  beyond  the  control  of  any  individual  or  firm,  and  in 
some  cases  they  extend  beyond  the  state  boundaries,  so  that 
two  or  more  states  are  involved  in  the  project.  In  such  cases 
the  enterprise  can  be  successfully  carried  out  only  under  state 
or  national  management.  Another  reason  for  the  public  interest 
in  this  problem  is  that,  in  addition  to  the  economic  value  of  the 
land  that  is  reclaimed,  there  is  the  positive  menace  to  health  of 
unreclaimed  swamp  land.  Drainage  may,  therefore,  be  a  matter 
of  public  interest  for  sanitary  reasons  alone. 

The  appeal  to  the  imagination  which  such  enterprises  make 
is  not  to  be  ignored.  Such  lands  are  usually  exceedingly  fertile 
when  drained.  They  have  for  ages  received  the  washings  from 
the  higher  lands  surrounding  them  and  are  prevented  from 
becoming  highly  fertile  only  by  the  excess  of  water.  Anyone 
who  has  lived  on  or  traveled  across  lands  of  this  kind  and  seen 
what  remarkable  results  have  accrued  from  successful  drainage 
operations  must  have  been  stirred  to  some  degree  of  enthusiasm. 
Much  of  the  most  fertile  land  of  England,  especially  in  the 
eastern  counties,  was  at  one  time  fen,  or  swamp  land.  The 
drainage  and  reclamation  of  these  lands  have  to  be  counted 
among  the  greatest  achievements  of  English  genius.  In  the 
process  of  nation  building  they  would  have  to  be  named  among 
the  chief  contributors  to  the  greatness  of  the  British  nation. 

The  case  of  Holland.  Even  more  striking  results  are  found 
in  Holland,  much  of  whose  land  has  been  reclaimed  by  very 
laborious  methods.  In  fact,  a  great  deal  of  the  most  fertile 
land  of  Holland  today  lies  below  the  level  of  the  sea  and  is 
made  available  for  human  habitation  and  the  support  of  human 
life  by  extensive  drainage  operations  supplemented  by  pumping 
on  a  large  scale.  One  of  the  most  interesting  examples  is  that 


ECONOMICAL  USE  OF  LABOR  ON  LAND  233 

of  what  was  formerly  Haarlem  Lake.  Before  1839  this  was  a 
body  of  water  covering  approximately  forty-two  thousand  acres 
at  an  average  depth  of  a  little  over  thirteen  feet.  In  fact,  con- 
siderable traffic  by  boat  was  maintained  on  this  lake  among  the 
towns  situated  on  its  border.  Before  deciding  to  drain  the  lake 
it  was,  therefore,  necessary  to  provide  a  substitute  in  the  way  of 
transportation  facilities  between  these  towns.  Accordingly  a 
canal  was  built  around  the  border  of  the  lake,  having  a  total 
length  of  thirty-eight  miles,  a  depth  of  nine  feet,  and  a  width  of 
a  hundred  and  fifteen  to  a  hundred  and  thirty  feet.  This  not 
only  provided  for  traffic  by  boat  among  the  towns  that  had 
grown  up  but  it  was  high  enough  to  drain  by  gravitation  into 
the  sea.  The  water  from  the  lake,  however,  had  to  be  lifted  into 
this  canal,  and  this  was  done  by  three  gigantic  plants,  each  one 
capable  of  pumping  a  million  tons  in  twenty-five  and  one-half 
hours.  It  took  three  years  of  constant  pumping  to  empty  the 
lake,  and  the  pumping  plants  have  had  to  be  kept  intact  ever 
since  in  order  to  safeguard  against  flooding.  As  soon  as  the  lake 
was  pumped  dry  the  sale  of  land  began,  and  the  total  price  of 
$3,760,000  was  realized.  This  was  not  enough  to  pay  the  cost 
of  reclamation;  but  there  were  other  advantages,  such  as  the 
improvement  in  health  and  the  safeguarding  of  the  towns 
around  its  border  against  high  water,  from  which  they  had 
suffered  several  times  before. 

Swamps  in  the  United  States.  In  the  United  States  it  is  esti- 
mated that  there  are  somewhere  between  sixty  and  eighty 
million  acres  of  swamp  land  capable  of  ultimate  reclamation. 
These  are  widely  distributed,  but  there  are  several  special  sec- 
tions where  these  lands  are  located  in  considerable  quantities : 
first,  the  Atlantic  Coastal  Plain  (especially  from  Virginia  to 
Florida) ;  second,  the  lower  Mississippi  Valley ;  third,  the 
northern  halves  of  the  three  states  of  Michigan,  Wisconsin,  and 
Minnesota.  There  are  numerous  other  small  areas  of  consid- 
erable importance  in  themselves,  such  as  the  Sacramento  and 
San  Joaquin  River  valleys  of  central  California.  When  all  these 
swamp  lands  are  drained  and  brought  under  cultivation  it  is 


234  PRINCIPLES  OF  NATIONAL  ECONOMY 

not  improbable  that  they  will  easily  support  two  million  fami- 
lies. Allowing  five  persons  to  the  family,  this  will  add  ten  mil- 
lion to  the  number  of  people  who  can  be  supported  within  the 
present  boundaries  of  the  United  States. 

In  addition  to  the  reclamation  of  swamp  land  (that  is,  of 
land  too  wet  for  any  kind  of  cultivation),  there  is  the  vast 
problem  of  draining  land  which  is  capable  of  cultivation  in 
ordinary  weather  but  on  which  crops  are  subject  to  injury  by 
wet  weather.  This  can  hardly  be  called  reclamation  in  the 
strictest  sense,  and  yet  it  is  of  great  economic  importance  in 
that  it  adds  greatly  to  the  productivity  of  the  land  already 
under  cultivation  or  capable  of  cultivation.  .Throughout  the 
greater  part  of  the  territory  east  of  the  Missouri  and  Mississippi 
Rivers  crops  probably  suffer  in  the  long  run  more  from  wet  than 
from  dry  weather.  The  irrigation  of  these  lands  is,  therefore, 
not  considered  of  immediate  importance,  though  as  a  safeguard 
against  occasional  spells  of  dry  weather  it  may  ultimately  be 
considered  an  economic  possibility.  Drainage,  however,  as  a 
means  of  preventing  the  evil  effects  of  spells  of  wet  weather  has 
since  1870  had  considerable  development  and  is  certain  to  have 
more  in  the  future. 

Dry  land.  The  problem  of  reclaiming  dry  land  has  received 
even  more  public  attention  in  this  country  and  throughout  the 
world  than  that  of  reclaiming  either  stony  or  wet  land.  One 
obvious  reason  is  that  there  is  much  more  dry  than  wet  land  in 
this  country  and  in  the  world.  More  than  half  of  the  land  of 
the  world  which  would  otherwise  be  tillable  is  either  unculti- 
vated or  very  meagerly  cultivated  because  of  the  scarcity  of 
moisture.  Fully  half  of  the  land  of  this  country  otherwise  till- 
able suffers  also  from  lack  of  moisture.  Relatively  speaking, 
it  is  generally  assumed  that  the  ninety-eighth  meridian  comes 
as  near  being  the  dividing  line  between  the  humid  and  the  arid 
sections  of  the  country  as  any  line  that  can  be  selected. 

The  distance  along  the  ninety-eighth  meridian  from  the  Ca- 
nadian border  to  the  Rio  Grande  is  approximately  fifteen  hun- 
dred miles.  Aside  from  the  lack  of  water  this  land  would  cross 


ECONOMICAL  USE  OF  LABOR  ON  LAND  235 

practically  no  waste  land ;  that  is  to  say,  the  land  is  smooth,  is 
free  from  stones,  and  possesses  a  deep  soil  rich  in  plant  food. 
These  conditions  continue  westward  as  far  as  the  Rocky  Moun- 
tains, an  average  distance  of  more  than  two  hundred  miles.  The 
acreage  included  in  this  strip  is  slightly  greater  than  that  of 
France  and  almost  equal  to  that  of  the  former  German  Empire. 
Yet  the  lack  of  water  prevents  it  and  will  continue  to  prevent  it 
from  supporting  a  dense  population  unless  that  difficulty  can 
be  overcome. 

There  are  two  recognized  methods  of  dealing  with  the  prob- 
lem of  dry  land.  The  first  goes  under  the  name  of  dry  farming, 
which  consists  in  the  economizing  and  conserving  of  the  lim- 
ited moisture 'supplied  by  the  rains  and  the  dews;  the  other  is 
irrigation,  which  consists  in  conducting  water  from  the  moun- 
tain streams  and  distributing  it  over  the  tillable  lands  of  the 
valleys  and  the  plains. 

Dry  farming.  While  irrigation  is  the  more  spectacular  method 
of  the  two  and,  wherever  streams  are  available,  is  vastly  to  be 
preferred,  nevertheless  it  is  limited  in  its  scope  and  has  never 
been  used  so  widely  as  the  other  method.  Much  of  the  agricul- 
ture of  the  world  has  always  been  carried  on  under  what  we 
call  in  this  country  conditions  of  dry  farming ;  that  is,  under 
conditions  where  the  farmer's  chief  problem  was  that  of  econ- 
omizing, conserving,  and  utilizing  to  the  fullest  extent  a  very 
limited  supply  of  moisture.  The  methods  of  dry  farming  fall 
in  turn  into  two  main  classes:  first,  those  that  prevent  the 
waste  of  the  existing  supply  of  moisture ;  second,  the  planting 
of  crops  that  are  adapted  to  dry  soils  (that  is,  crops  that  will 
mature  with  a  minimum  supply  of  moisture).  There  are  in 
turn  two  methods  of  preventing  the  waste  of  the  existing  supply 
of  moisture :  one  is  to  prevent  the  rainfall  from  running  away  in 
the  streams  by  enabling  it  to  soak  into  the  ground  as  quickly 
and  easily  as  possible.  Many  of  the  rains  of  these  arid  regions 
come  in  the  form  of  torrential  showers.  If  the  surface  is  hard 
and  baked,  much  of  this  rain  will  run  away  in  the  streams  and 
never  soak  into  the  soil  at  all.  If,  however,  the  soil  is  thoroughly 


236  PRINCIPLES  OF  NATIONAL  ECONOMY 

broken  and  loosened,  it  soaks  in  much  more  rapidly,  and  much 
less  of  it,  therefore,  will  be  lost  in  the  streams.  The  other 
method  is  to  prevent,  as  far  as  possible,  the  loss  by  evaporation. 
In  the  intense  heat  of  the  summer,  especially  if  the  winds  are 
very  deficient  in  moisture,  this  occasions  considerable  loss.  For- 
tunately the  same  method  which  will  enable  the  rain  to  sink 
readily  into  the  soil  tends  to  prevent  or  reduce  to  a  minimum 
the  loss  by  evaporation  ;  that  is,  if  the  surface  of  the  soil  is  kept 
broken  and  loose  the  moisture  from  below  does  not  rise  by 
capillarity  near  enough  to  the  surface  to  come  in  direct  con- 
tact with  the  winds — in  other  words,  it  remains  below  the 
surface  where  it  may  be  reached  by  the  roots  of  the  plants. 

Drought-resisting  crops.  The  selection  of  drought-resisting 
crops  contains  many  possibilities  and  appeals  to  the  imagina- 
tion, especially,  because  of  the  element  of  discovery  and  adven- 
ture which  it  involves.  As  suggested  above,  the  greater  part  of 
the  surface  of  the  earth  is  dry :  the  vast  steppes  of  central  Asia, 
the  greater  portion  of  Africa  (practically  all  of  it,  in  fact,  ex- 
cept the  great  Congo  Basin),  and  all  of  South  America  except 
the  great  Amazon  Valley  are  dry  countries.  The  exploration  of 
these  vast  areas  for  the  discovery  of  plants  that  flourish  there 
and  that  may  be  of  use  to  man  has  only  begun.  No  one  can 
tell  what  possibilities  may  lie  hidden  there.  Already,  however, 
a  beginning  has  been  made,  and  a  number  of  drought-resisting 
crops  have  been  introduced,  including  some  near  relatives  of 
wheat  and  various  sorghums,  sunflowers,  etc.  No  one  can  yet 
say  how  far  a  combination  of  these  methods  of  saving  the  mois- 
ture and  introducing  drought-resisting  plants  may  enable  us 
to  utilize  effectively  the  vast  dry  areas  of  this  country.  One 
can  at  least  say,  however,  that  there  is  a  possibility  that 
sometime  the  greater  part  of  our  Far  West  will  be  growing  crops 
of  some  kind. 

Irrigation.  While  the  methods  of  dry  farming  are  historically 
quite  as  old  as  the  methods  of  irrigation  and  have  been  carried 
on  over  much  wider  areas,  still  public  discussion  of  irrigation  is 
much  older  in  this  country  than  is  that  of  dry  farming,  partly, 


ECONOMICAL  USE  OF  LABOR  ON  LAND          237 

perhaps,  because,  as  suggested  above,  where  water  is  available 
for  irrigation  it  represents  undoubtedly  a  very  much  more  effec- 
tive method  of  reclamation  than  does  dry  farming.  Since  the 
very  earliest  settlements  of  our  Far  West,  irrigation  enterprises 
have  been  carried  on  either  on  a  small  or  on  a  large  scale.  In  fact 
the  prehistoric  inhabitants  of  some  sections  of  our  Far  West 
made  use  of  it.  The  early  Spanish  missionaries  also  constructed 
irrigation  works  around  their  missions.  The  first  development  of 
irrigation  on  a  comprehensive  scale,  however,  was  undertaken 
by  the  Mormons,  immediately  after  the  founding  of  their  colony 
on  the  Great  Salt  Lake  in  1849.  Having  chosen  to  abide  in  what 
to  all  appearances  was  a  desert,  they  were  compelled  by  the  very 
necessities  of  existence  to  put  water  upon  the  land  in  order  to 
provide  themselves  with  subsistence.  Under  the  spur  of  this 
necessity  they  worked  with  an  energy  and  intelligence  that  have 
seldom  been  equaled.  The  prosperity  of  the  Mormon  com- 
munity is  based  primarily  on  the  irrigation  ditch.  The  second 
attempt  on  a  comprehensive  scale  was  at  Greeley,  Colorado, 
where  the  cooperative  principle  was  applied,  though  the  coop- 
erators  were  not  held  together  by  a  common  religious  belief. 
Somewhat  later,  and  partly  as  the  result  of  the  examples  of 
Salt  Lake  City  and  Greeley,  Colorado,  an  era  of  speculation  in 
irrigated  lands  developed,  especially  in  California.  One  writer 
has  said,  "Where  Utah  and  Colorado  depended  only  upon  their 
hands  and  teams  for  the  building  of  irrigation  works,  California 
issued  stocks  and  bonds  and  so  mortgaged  its  future."1  That 
is  to  say,  instead  of  the  prospective  farmers'  taking  their  own 
teams  and  with  their  own  labor  building  their  own  ditches, 
money  was  raised  by  the  sale  of  bonds,  and  with  this  money 
men  were  hired  to  build  the  dams  and  dig  the  ditches.  Under 
this  method  a  number  of  irrigation  works  were  built  and,  where 
properly  built,  served  the  needs  of  agriculture;  but  in  many 
cases  the  people  who  had  put  their  money  into  the  shares  of 
the  irrigation  companies  never  got  it  back.  So  frequently  was 

1Elwood  Mead,  "Rise  and  Future  of  Irrigation  in  the  United  States,"  in 
Yearbook  of  the  United  States  Department  oj  Agriculture,  1809. 


238  PRINCIPLES  OF  NATIONAL  ECONOMY 

this  the  case  that  it  became  difficult  to  raise  money  by  this 
method.  The  next  stage  in  the  development  of  irrigation  policy 
was  the  constructing  of  irrigation  systems  by  state  or  govern- 
ment enterprise.  The  reclamation  policy  of  the  Federal  gov- 
ernment is  characteristic  of  this  method.  Under  this  policy  a 
considerable  area  is  selected  as  suitable  for  irrigation  on  account 
of  its  contour,  its  proximity  to  streams,  and  the  ease  of  dis- 
tributing water  by  gravitation.  The  whole  project  is  surveyed, 
the  dams  and  ditches  are  built,  and  then  the  land  is  opened 
to  settlement  by  actual  farmers,  each  farmer  paying  his  pro- 
rata  share  of  the  actual  cost  of  the  irrigation  system.  Even 
under  this  method,  however,  it  has  frequently  been  the  case 
that  the  cost  of  irrigation  was  so  great  that  the  farmer  had  to 
pay  rather  more  than  his  land  was  worth  after  it  was  irrigated. 
Eventually,  however,  when  the  demand  for  agricultural  prod- 
ucts increases  with  our  growing  population,  and  the  price  of  ag- 
ricultural products  rises,  the  value  of  the  land  will  undoubtedly 
increase  sufficiently  to  cover  the  cost  of  construction. 

Bad  chemical  conditions.  Comparatively  little  public  atten- 
tion has  been  given  to  the  reclamation  of  lands  that  are  unused 
because  of  bad  chemical  conditions.  A  great  deal  of  the  land 
of  the  eastern  third  of  the  United  States  contains  too  much  acid 
and  requires  constant  applications  of  lime.  This,  however,  has 
never  been  considered  a  subject  for  public  enterprise.  The 
individual  farmer  can  probably  apply  lime  to  his  individual 
farm  quite  as  efficiently  as  it  could  be  applied  by  any  large  com- 
pany or  the  state  or  the  nation.  The  problem  of  alkali  land  is 
a  little  more  baffling.  Where  most  of  the  moisture  that  sinks 
into  the  soil  never  runs  away,  but  rises  to  the  surface  and  is 
carried  away  by  evaporation,  the  soluble  salts  are  never  leached 
out,  but  come  to  the  surface  and  are  left  when  the  water  evapo- 
rates. In  some  cases  the  first  few  inches  of  surface  become  so 
impregnated  as  to  prevent  the  growth  of  useful  plants.  In 
general  the  methods  of  dealing  with  alkali  land  are  as  easily 
within  the  reach  of  the  average  farmer  as  of  the  state  or  nation. 
In  mild  cases  deep  plowing,  by  means  of  which  the  surface 


ECONOMICAL  USE  OF  LABOR  ON  LAND     239 

where  the  alkali  is  too  abundant  is  turned  under  and  soil  suit- 
able for  plant  growth  is  thrown  onto  the  surface,  is  sufficient. 
If  in  addition  to  this  the  surface  is  kept  broken  so  that  the 
process  of  evaporation  is  retarded,  it  is  unlikely  that  another 
crust  of  alkali  will  form  on  the  top.  In  very  bad  cases,  however, 
it  appears  that  nothing  but  underdrainage  will  cure  the  diffi- 
culty ;  that  is,  where  the  water  containing  considerable  quanti- 
ties of  alkali  in  solution  is  drained  off  and  not  allowed  to  come 
to  the  surface  and  evaporate,  the  cure  is  permanent.  Something 
can  also  be  done  by  introducing  crops  which  tolerate  consider- 
able quantities  of  alkali.  The  sugar  beet  has  been  found  to  be 
one  of  the  most  tolerant  of  all  our  crops  toward  alkaline  condi- 
tions. Experiments  have  been  made  with  Australian  saltbushes. 
Alfalfa  is  mildly  tolerant  and  is  a  prodigiously  profitable  crop 
on  certain  lands  that  are  mildly  alkaline. 

Bad  political  conditions.  Under  bad  political  conditions  we 
might  include  a  good  many  things  that  would  be  subjects  of 
controversy.  There  is  no  doubt,  however,  that  a  repressive 
system  of  taxation  or  a  condition  of  government  which  would 
make  farmers  uncertain  as  to  the  results  of  their  farming 
would  have  a  powerful  influence  in  causing  land  to  go  to  waste. 
In  the  earliest  settlement  of  our  Western  lands  the  Federal 
government's  purpose  was  to  replenish  its  treasury  from  land 
sales  and  to  pay  off  its  national  debt.  So  long  as  this  policy 
was  followed  strictly  there  was  little  inducement  to  actual  set- 
tlement, but  much  inducement  to  speculation  in  Western  lands  ; 
that  is,  they  were  bought  up  in  considerable  tracts  by  men  who 
had  considerable  funds  of  money  to  invest.  Gradually,  how- 
ever, a  different  policy  was  adopted,  culminating  in  the  Home- 
stead Act  of  1862,  under  which  land  was  given  without  money 
and  without  price  to  any  qualified  settler  who  would  live  on  it 
and  cultivate  it  for  five  years.  This  method  undoubtedly  en- 
couraged the  rapid  settlement  of  our  Western  lands  much  more 
effectually  than  the  earlier  policy  had  done.  An  unstable  local 
government  in  which  the  farmer's  property  is  not  adequately 
protected  against  town  marauders  or  other  depredators  is  one 


240  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  the  most  effective  causes  of  waste  land.  This  is  especially 
true  of  small  holders,  who  could,  if  they  were  properly  encour- 
aged, grow  a  considerable  proportion  of  their  subsistence  in 
their  own  gardens.  If  one's  garden,  however,  is  not  safe  and  is 
liable  to  be  despoiled,  or  its  products  stolen,  the  would-be  gar- 
dener has  little  encouragement  to  maintain  a  garden.  It  is  well 
understood  that  one  of  the  greatest  obstacles  in  the  way  of 
sheep  husbandry  in  this  country  is  the  depredation  of  the  town 
dog,  which  could  easily  be  eliminated  if  the  public  had  the 
intelligence  to  deal  with  it  in  a  vigorous  manner. 


CHAPTER  XVI 
ECONOMIZING  LAND 

In  a  new  country  where  land  is  abundant  and  labor  scarce 
the  problem  of  economizing  land  is  never  acute.  The  tendency 
is  to  economize  labor  to  the  maximum  and  to  use  land  merely 
as  a  means  to  that  end.  This  frequently  results  in  a  wasteful 
use  of  land.  In  old  and  thickly  settled  countries,  however,  the 
problem  of  economizing  land  tends  to  become  almost  as  impor- 
tant as  that  of  economizing  labor.  In  fact,  in  densely  overpop- 
ulated  countries  men  are  sometimes  regarded  as  the  cheapest 
and  land  as  the  most  precious  of  national  assets.  Even  where 
men  are  properly  regarded  as  the  greatest  asset,  the  problem 
of  conserving  and  economizing  land  or  natural  resources  is  a 
very  serious  one. 

Land,  however,  has  many  properties,  and  some  of  these  prop- 
erties do  not  need  to  be  economized,  either  because  they  cannot 
be  exhausted  or  because  they  are  not  scarce.  The  following 
classification  shows  the  properties  that  need  to  be  economized. 

....  f  r.  Location 

A.  Noneconomic^    '  "  B.  Economics  2.  Fertility 

L  2.  Extension  . ,.        , 

L3.  Minerals 

Noneconomic  properties  of  land.  Some  of  the  physical  and 
geometric  properties  of  land  which  are  the  most  fundamental 
are  not  the  most  important  from  an  economic  point  of  view. 
The  solidity  of  the  earth  which  serves  to  support  our  weight, 
and  that  of  the  buildings  which  we  erect  and  the  plants  which 
we  grow,  is  of  course  essential  to  our  very  existence.  It  is  not 
a  matter  of  the  greatest  economic  interest,  however,  because  it 
is  not  so  scarce  as  some  other  properties.  Rocky  or  desert  land, 
of  which  there  is  an  abundance,  furnishes  support  as  well  as 

241 


242  PRINCIPLES  OF  NATIONAL  ECONOMY 

fertile  land.  The  quality  of  extension  (that  is,  superficial  area) 
is  also  essential.  It  is  this  which  enables  us  to  catch  and  utilize 
the  sun's  rays,  the  rain,  and  the  dew.  It  is  this  which  provides 
room  for  plants  to  grow,  to  spread  their  roots  to  the  soil  and 
their  leaves  to  the  air.  It  is  this  which  furnishes  space  for  the 
erection  of  buildings  and  the  carrying  on  of  all  activities.  This 
quality  of  extension,  however,  is  possessed  by  sterile  as  well 
as  by  fertile  land,  and  by  land  which  is  badly  located  as  well  as 
by  that  which  is  well  located. 

Economic  properties.  Location  may  also  be  said  to  be  a 
geometric  property  of  land.  It  is  a  matter  of  great  economic 
importance  because  there  is  such  a  scarcity  of  land  in  the  best 
locations.  By  location  is  meant  proximity  and  convenience  of 
access  to  markets,  roads,  schools,  scenery,  and  various  other 
desirable  things.  Some  land  is  greatly  superior  to  other  land  in 
this  respect,  and  this  creates  a  great  difference  in  the  desirabil- 
ity of  different  lands.  Location  is  the  chief,  almost  the  only 
factor  in  determining  the  value  of  urban  land.  In  a  place  where 
multitudes  of  people  desire  to  live,  land  is  necessarily  scarce, 
but  the  scarcity  is  that  of  land  well  located  for  urban  pur- 
poses ;  that  is,  for  business  or  for  the  dwellings  of  those  who 
have  to  live  within  reach  of  the  business  establishments.  More- 
over, the  differences  in  the  value  of  lands  within  a  city  are  due 
almost  wholly  to  differences  in  location.  In  agricultural  com- 
munities location  is  a  factor,  but  not  the  only  nor  the  most 
important  factor,  in  determining  land  values.  Nearness  to 
markets  or  to  railroads,  the  character  of  the  wagon  roads,  acces- 
sibility to  schools  and  other  social  advantages,  count  for  much ; 
but  the  character  of  the  soil  and  the  subsoil,  the  climate,  the 
moisture,  and  the  other  factors  which  determine  plant  growth 
count  far  more.  All  these  factors  which  promote  plant  growth 
may  be  grouped  under  the  name  "fertility."  In  that  case  we 
may  say  that  from  an  economic  point  of  view  location  and 
fertility  are  the  most  important  properties  of  agricultural  land. 

Good  location  saves  transportation.     When  we  look  for  the 
reason  why  location  is  a  matter  of  such  importance  we  must 


ECONOMIZING  LAND  243 

recall  the  fact  that  man's  chief  work,  on  the  physical  side,  is 
the  moving  of  materials.  It  is  this  which  requires  power ;  and 
power  is  costly,  whether  it  be  generated  in  the  human  body  and 
exercised  through  the  muscles,  or  whether  it  be  developed  in  the 
bodies  of  animals  or  through  mechanical  agents.  One  very 
important  phase  of  the  work  of  moving  materials  is  that  of 
marketing  products.  The  nearer  a  body  of  land  is  to  a  market 
and  the  better  the  means  of  transportation,  the  less  labor  and 
power  it  takes  to  get  its  products  to  market.  On  land  which  is 
well  located  with  respect  to  markets  it  is  therefore  possible  to 
utilize  labor  more  efficiently  than  on  land  which  is  badly  located. 

It  is  also  costly  to  move  man  himself.  It  is  therefore  advan- 
tageous that  he  should  live  in  close  proximity  to  his  work.  If 
he  lives  far  away  the  cost  of  transportation  is  greater  and  the 
labor  force  of  the  community  is  less  efficiently  applied  than  if 
he  lives  close  by.  Even  though  the  trolley  fare  is  the  same  for 
a  long  distance  as  for  a  short  distance,  transportation  costs 
more  over  the  long  distance.  In  the  first  place,  it  takes  a  longer 
time  and  the  passenger  loses  that  time.  In  the  second  place,  it 
costs  the  transportation  company  more,  and  that  extra  cost 
must  ultimately  reduce  the  total  productive  power  of  the  com- 
munity. The  extra  labor  required  to  transport  passengers  a 
longer  distance  might  otherwise  be  used  in  other  lines  of  pro- 
duction. However,  the  sheer  scarcity  of  land,  both  for  business 
and  for  residence  purposes,  forces  the  population  to  spread  and 
makes  long-distance  transportation  necessary,  however  costly 
it  may  be. 

In  proportion  as  transportation  can  be  cheapened,  in  that 
proportion  will  questions  of  location  become  of  less  importance 
from  the  standpoint  of  production.  From  the  standpoint  of 
consumption  or  direct  enjoyment  cheapened  transportation 
would  apparently  make  little  difference.  Certain  neighbor- 
hoods, because  of  neighbors,  scenery,  fashion,  and  a  variety  of 
reasons,  would  still  be  preferred  to  others.  If  one  could  imagine 
costless  transportation,  such  as  is  pictured  in  the  Arabian 
Nights  by  the  story  of  the  magic  rug,  on  which  one  could  be 


244  PRINCIPLES  OF  NATIONAL  ECONOMY 

instantly  transported  to  any  distance,  one  location  would  be  as 
desirable  for  production  as  another;  that  is  to  say,  if  there 
were  no  difference  between  two  pieces  of  land  in  fertility  or  in 
anything  else  except  location,  they  would  be  equally  desirable. 
It  would  cost  no  more  to  transport  products  to  market  or  men 
to  and  from  their  work  in  one  case  than  in  another.  So  far  as 
location  is  concerned  there  would  be  no  scarcity  of  land  until 
all  the  unoccupied  portions  of  the  earth  were  occupied  and  uti- 
lized. In  short,  such  a  perfect  system  of  transportation  would 
vastly  increase  our  available  supply  of  unsalable  land. 

While  it  is  obvious  that  no  such  instantaneous  and  costless 
system  of  transportation  will  ever  be  devised,  it  is  equally  obvi- 
ous that  the  more  nearly  we  can  approach  that  system  the  more 
land  we  shall  have  available  for  all  sorts  of  purposes.  It  is  the 
superiority  of  modern  as  compared  with  earlier  means  of  trans- 
portation which  makes  possible  those  vast  aggregations  of 
people  known  as  cities.  They  can  draw  their  supplies  from 
greater  distances  and  in  greater  abundance  than  would  be  possi- 
ble with  less  efficient  means  of  transportation.  Ancient  cities 
that  were  situated  on  navigable  rivers  or  on  the  seashore  had 
the  advantage  of  water  transportation,  which,  even  before 
the  days  of  steamships,  was  fairly  cheap  and  efficient.  Non- 
perishable  products,  such  as  wheat,  could  then  and  can  still 
be  transported  long  distances  in  sailing  vessels  at  low  cost. 
Consequently,  where  water  transportation  was  possible,  cities 
of  considerable  size  grew  up  long  before  the  days  of  steam 
railways.  But  inland  cities,  such  as  many  of  those  which 
dot  the  maps  of  every  progressive  country,  would  have  been 
an  impossibility. 

Access  to  food  supplies.  It  seems  to  be  a  general  rule,  apply- 
ing to  all  forms  of  life,  that  numbers  depend  upon  food  supply. 
Where  food  is  abundant,  numbers  may  be  large.  Since  food 
comes  ultimately  from  the  soil,  the  capacity  of  the  soil  to  pro- 
duce food  places  a  limit  upon  numbers.  One  of  two  things  must, 
of  course,  follow :  a  large  population  must  either  spread  over 
wide  areas  of  land  in  order  to  find  sufficient  food,  or  it  must 


ECONOMIZING  LAND  245 

transport  food  from  these  wide  areas  where  it  is  produced  to  the 
densely  populated  centers  where  the  people  live.  Certain  birds 
reverse  this  process  and  manage  to  live  a  part  of  the  time  in 
large  flocks  and  transport  themselves  to  and  from  their  feeding- 
grounds.  If  they  are  strong  fliers,  as  were  the  wild  pigeons 
which  formerly  inhabited  this  continent,  they  may  feed  over 
large  areas  and  return  to  their  roosting-places  at  night.  It  was 
their  remarkable  powers  of  flight  which  enabled  such  vast  num- 
bers to  roost  in  the  same  locality ;  otherwise  they  would  have 
been  compelled  to  break  up  into  smaller  flocks  in  order  to  live 
nearer  their  feeding-grounds.  The  same  law  seems  to  apply  to 
human  flocks.  If  we  were  not  able  to  transport  food  and  other 
supplies  such  long  distances  our  large  cities  would  be  compelled 
to  scatter  and  we  should  have  to  build  many  smaller  cities,  or 
else  live  as  scattered  families,  in  order  to  be  nearer  the  sources 
of  supply.  Even  with  our  present  means  of  transportation  there 
are  limits  beyond  which  it  does  not  seem  to  be  advantageous  to 
concentrate  our  population.  Consequently  we  find  many  small 
cities  and  towns  whose  people  live  by  the  indoor  industries. 
They  are  nearer  sources  of  supplies  of  various  kinds,  besides 
having  more  room  for  their  own  industries. 

Increasing  floor  space  by  erecting  tall  buildings.  The  neces- 
sity for  room  for  the  indoor  industries  can  be  supplied  in  part 
by  tall  buildings.  Floor  space  can  be  increased  by  as  many 
stories  as  can  be  built,  subtracting,  of  course,  the  space  neces- 
sary for  elevators,  stairways,  airshafts,  etc.  But  after  a  very 
moderate  height  is  reached,  the  cost  of  construction  increases 
more  than  in  proportion  to  the  added  floor  space.  To  add  one 
more  story  on  the  top  of  a  tall  building  requires  stronger  walls 
all  the  way  down  and  also  a  better  foundation.  Besides,  it  costs 
more  to  carry  the  building  materials  to  the  greater  height  and 
the  cost  of  elevator  service  to  the  top  floor  is  somewhat  higher 
than  for  lower  floors.  A  twenty-story  building  is  of  a  very 
moderate  height  in  some  of  our  large  cities,  where  land  is  very 
scarce,  but  even  this  height  would  be  absolutely  unprofitable  in 
a  town  where  there  was  plenty  of  room  on  the  ground. 


246  PRINCIPLES  OF  NATIONAL  ECONOMY 

Streets.  The  traffic  needs  of  a  busy  population  also  make 
demands  upon  land  for  streets.  Much  the  same  methods  are 
used  to  economize  land  for  street  purposes  as  for  building  pur- 
poses. The  building  of  subways,  sub-subways,  elevated  roads, 
and  viaducts  is  a  familiar  method.  It  used  to  be  suggested  in  a 
jocular  way  that  a  road  through  the  air  would  also  economize 
land.  Flying  machines  may  eventually  transform  that  joke  into 
a  real  economy.  Superior  pavements  for  the  support  of  larger 
and  more  powerful  vehicles  will  also  economize  road  space 
somewhat  by  permitting  more  traffic  to  be  carried  on  over  a 
street  of  given  width. 

Economizing  agricultural  land.  These  methods  of  economiz- 
ing land  are  suited  to  urban  rather  than  to  rural  districts. 
Space  is  required  in  agriculture,  as  suggested  above,  for  the 
utilization  of  solar  energy,  soil,  and  moisture  in  plant  growth. 
"Two-story  farming,"  as  Professor  J.  Russell  Smith  calls  it, 
consists  in  growing  tree  crops  and  ground  crops  underneath  the 
trees.  Some  space  can  be  saved  in  this  way,  where  there  is 
plenty  of  sunlight,  soil,  and  moisture,  but  not  very  much.  It 
enables  the  plants  to  utilize  sunlight  a  little  more  effectively, 
perhaps,  because  the  low-growing  plants  can  use  that  which 
filters  through  the  foliage  of  the  trees ;  but  if  the  trees  use  too 
much  (that  is,  if  the  low-growing  plants  are  shaded  too  much) 
their  development  is  retarded.  There  may  be  some  economy  of 
soil  fertility  also  if  the  trees  send  their  roots  deeper  than  the 
smaller  plants.  In  that  case  the  two  kinds  of  growth  do  not 
compete  directly  for  soil  fertility.  Where  an  abundance  of 
artificial  fertilizer  can  be  used  and  water  for  irrigation  is 
plentiful,  an  adequate  supply  of  plant  food  and  moisture  can 
be  supplied  to  both  kinds  of  vegetation.  In  this  case  the  limit- 
ing factor  is  sunlight.  This  is  a  factor  for  which  we  have  not 
yet  found  a  good  substitute.  Therefore  we  must  continue  to 
spread  our  cultivation  over  wider  areas  if  we  are  to  support 
larger  populations. 

Intensive  cultivation.  There  are  two  somewhat  distinct 
methods  of  getting  a  larger  product  from  the  land  already  under 


ECONOMIZING  LAND  247 

cultivation.  One  is  the  more  intensive  cultivation  of  existing 
crops ;  the  other  is  the  substitution  of  heavy-yielding  for  light- 
yielding  crops.  The  chief  difficulty  with  the  method  of  inten- 
sive cultivation  is,  of  course,  the  well-known  law  of  diminishing 
returns.  This  has  already  been  discussed  in  Chapter  IX  and  will 
be  treated  with  greater  detail  in  Chapters  XIV  and  XXXIII. 
It  will  be  sufficient  at  this  point  to  remark  that  in  order  to 
double  the  yield  of  any  given  crop  under  ordinary  conditions  it 
will  require  more  than  double  amounts  of  labor  or  capital  in  the 
cultivation  of  the  land ;  or,  in  more  general  terms,  to  get  an 
increased  product  from  land  requires  a  more  than  proportion- 
ally increased  application  of  labor  and  capital  to  its  cultivation. 

Intensive  farming.  "Two-story  farming"  is  only  one  phase 
of  intensive  agriculture,  which  may  be  defined  as  the  use  of 
large  quantities  of  labor  and  capital  in  the  cultivation  of  rela- 
tively small  areas  of  land  in  order  to  get  large  crops  per  unit 
of  land ;  that  is,  large  crops  per  acre.  As  pointed  out  in 
Chapter  XV  extreme  efforts  to  increase  the  productivity  of  land 
tend  to  decrease  the  productivity  of  labor ;  that  is,  to  reduce  the 
product  per  unit  of  labor.  When  a  country  becomes  thickly 
populated,  however,  if  its  people  are  unwilling  to  migrate  to 
countries  where  land  is  abundant  the  problem  of  economizing 
land  becomes  one  of  great  importance.  So  long  as  it  can  find 
markets  for  the  products  of  indoor  industries,  it  may  bring  the 
products  of  the  soil  from  less  densely  populated  countries. 
When  these  outside  markets  cease  to  expand,  and  it  is  therefore 
compelled  to  live  more  and  more  from  the  products  of  its  own 
soil,  it  must  perforce  get  more  and  more  out  of  its  soil.  Inten- 
sive agriculture  is  then  forced  upon  it.  Yet  as  a  matter  of 
observed  fact  intensive  agriculture  the  world  over  is  asso- 
ciated with  the  poverty  of  those  who  actually  work  on  the  soil, 
though  it  may  be  also  associated  with  the  riches  of  those  who 
own  the  soil. 

Intensive  farming  and  poverty.  This  impoverishment  of  the 
worker  on  the  soil  where  the  latter  is  intensively  cultivated  is 
not  absolutely  necessary  except  where  the  intensive  cultivation 


248  PRINCIPLES  OF  NATIONAL  ECONOMY 

is  carried  to  extremes.  It  is  a  necessary  result,  however,  if  the 
attempt  is  made  to  wrest  a  larger  crop  from  the  soil  by  the  mere 
application  of  more  and  more  labor  to  each  acre  of  land.  The 
yield  is  found  not  to  increase  in  proportion  as  the  labor  is  in- 
creased, which  necessarily  means  a  smaller  product  per  man. 
But  if  more  capital  is  used,  as  well  as  more  labor,  particularly  if 
better  methods  of  cultivation  are  adopted  and  carried  out  by 
means  of  the  larger  use  of  capital,  increasing  yields  per  acre 
may  be  secured  for  a  time  and  up  to  a  certain  point  without  any 
diminution  of  yield  per  unit  of  labor.  By  using  more  power  and 
larger  tools  in  order  to  plow  deeper  and  prepare  a  better  seed 
bed,  a  given  amount  of  labor  may  cultivate  the  same  acreage  of 
land  as  before  and  yet  get  a  larger  yield  per  acre.  This  would 
also  give  a  larger  yield  per  man.  Again,  by  cultivating  a  slightly 
smaller  acreage  and  cultivating  it  more  thoroughly  by  means  of 
better  tools,  the  same  product  per  man  may  be  secured  and  a 
somewhat  larger  population  may  be  supported  without  any 
diminution  in  average  income.  But  experience  shows  that 
wherever  even  this  process  is  carried  too  far  a  smaller  product 
per  man,  and  consequent  poverty,  will  be  the  result. 

A  seeming  exception  to  this  rule  (but  it  is  only  a  seeming 
exception)  is  found  when  a  few  cultivators  turn  from  the  grow- 
ing of  staple  crops  to  the  growing  of  high-priced  specialties. 
Only  a  few  can  do  this,  for  the  reason  that  the  market  is  very 
limited.  The  mass  of  the  farming  population  must  grow  the 
crops  which  feed  and  clothe  the  people.  Those  who  do  succeed 
in  the  production  of  agricultural  specialties  may  manage  to 
make  good  incomes  from  very  small  plots  of  land.  This  does 
not  prove  by  any  means  that  the  growers  of  wheat  or  beef 
could  do  likewise.  So  long  as  consumers  demand  wheat  bread 
and  beef  as  parts  of  a  steady  diet,  they  must  draw  their  sub- 
sistence from  considerable  areas,  for  these  products  can  be 
most  economically  produced  by  what  are  commonly  known  as 
extensive  methods  of  cultivation. 

The  other  possibility — that  of  substituting  heavy-yielding 
for  light-yielding  crops — may  be  considered  as  a  separate 


ECONOMIZING  LAND  249 

method  or  as  a  special  application  of  the  method  of  intensive 
cultivation.  The  simple  fact  is  that  some  crops,  such  as  wheat, 
do  not  respond  very  vigorously  to  intensive  cultivation,  whereas 
other  crops,  such  as  Indian  corn,  potatoes,  sugar  beets,  and 
many  of  the  standard  vegetables,  respond  much  more  vigor- 
ously. In  other  words,  in  the  growing  of  a  crop  of  wheat  it  is 
impossible,  except  by  the  most  laborious  and  expensive  methods, 
to  quadruple  the  average  yield  of  fifteen  bushels  to  the  acre, 
and  there  is  no  authentic  case  on  record  up  to  the  present 
moment  to  show  that  a  hundred  bushels  of  wheat  have  ever 
been  grown  on  an  acre.  With  the  potato,  however,  the  limit  is 
not  very  well  marked.  While  the  average  crop  is  less  than  a 
hundred  bushels  to  the  acre,  crops  of  five  hundred  bushels 
are  by  no  means  uncommon,  and  special  crops  of  a  thousand 
bushels  or  more  to  the  acre  are  well  authenticated. 

Kinds  of  food  that  require  wide  acreage.  It  happens  that  two 
of  our  standard  articles  of  diet — namely,  wheat  flour  and  beef — 
are  most  economically  grown  under  conditions  of  extensive  cul- 
tivation. This  explains,  doubtless,  why  wheat  tends  to  be  a 
frontier  crop,  and  beef  likewise.  Thirty  bushels  of  wheat  to 
the  acre  are  a  very  good  yield  even  under  intensive  cultivation, 
and  are  about  twice  the  average  yield  in  this  country ;  but  sixty 
bushels  of  corn  to  the  acre  are  quite  as  easily  produced  as  thirty 
bushels  of  wheat.  The  food  value  of  sixty  bushels  of  corn  is 
almost  double  that  of  thirty  bushels  of  wheat.  According  to 
Atwater's  tables  it  is  1.86  times  as  great.  Under  conditions  of 
fairly  good  cultivation,  therefore,  1.86  times  as  many  people 
could  be  supported  on  corn  as  on  wheat,  assuming  that  the 
land  in  question  is  equally  suitable  for  either  crop.  The  great 
advantage  of  wheat,  however,  is  that  it  stands  transportation 
better  than  corn,  and  also  that  power-driven  machinery  can  be 
used  a  little  more  effectively  in  growing  and  harvesting  it.  So 
long  as  there  are  vast  areas  of  frontier  lands  available  as  a 
source  of  food  it  will  continue  to  be  economical  to  make  use  of 
them, — in  other  words,  it  will  continue  to  be  economical  to  con- 
sume wheat  flour, — but  as  our  population  increases,  corn  tends 


250  PRINCIPLES  OF  NATIONAL  ECONOMY 

to  crowd  out  wheat  and  the  Corn  Belt  to  spread  at  the  expense 
of  the  Wheat  Belt.  This  is  limited,  however,  by  the  fact  that 
wheat  will  grow  in  drier  and,  especially,  in  colder  land  than 
corn.  There  is  much  good  wheat  land  that  will  scarcely  grow 
corn  at  all.  Such  land  will,  of  course,  continue  to  grow  wheat 
or  some  other  drought-resisting  or  cold-resisting  crop. 

The  yield  of  an  acre  of  beans  under  conditions  or  fair  culti- 
vation is  equal  in  food  value  to  1.29  times  that  of  wheat, 
whereas  under  conditions  of  fair  cultivation  an  acre  of  potatoes 
yields  2.06  times  the  food  value  of  an  acre  of  wheat,  and 
the  sweet  potato,  on  land  and  under  a  climate  suitable  for  its 
cultivation,  yields  4.82  times  the  food  value  of  an  acre  of 
wheat.  It  is  obvious,  therefore,  that  when  the  arid  regions 
which  now  supply  wheat  to  the  densely  populated  areas  of  the 
world  fail  to  be  adequate,  much  more  food  can  be  secured  from 
the  humid  regions  and  much  more  life  supported  if  the  people 
will  consent  to  consume  a  little  less  of  the  light-yielding  and  a 
little  more  of  the  heavy-yielding  crops. 

Beef,  like  wheat,  is  an  economical  form  of  food  so  long  as  an 
adequate  supply  can  be  secured  from  what  would  otherwise  be 
waste  land.  In  other  words,  so  long  as  there  are  arid  regions 
unsuitable  for  anything  but  pasturage,  and  so  long  as  these  dry 
pastures  can  supply  us  with  an  adequate  quantity  of  beef,  it 
will  be  economical  to  continue  consuming  beef  as  a  standard 
article  of  diet;  but  when  beef  from  this  source  proves  inade- 
quate, it  will  be  very  expensive  to  consume  beef  grown  on  land 
which  would  yield  vastly  more  food  if  devoted  to  other  crops. 
In  fact,  an  acre  of  good  corn  land  devoted  to  pasturage  and 
beef-growing  yields  less  than  one  tenth  as  much  food  value  as 
the  same  acre  would  if  devoted  to  growing  corn. 

Turning  to  heavy-yielding  crops.  If  people  would  change 
their  habits  of  consumption  and  consume  products  which  could 
be  economically  produced  under  intensive  methods,  or  products 
which  are  capable  of  yielding  large  quantities  of  food  per  acre, 
much  land  could  be  saved ;  in  other  words,  a  much  larger 
population  could  be  supported  from  a  given  area. 


ECONOMIZING  LAND 


251 


The  following  table  shows  the  estimated  power  of  an  acre 
of  land  under  good  cultivation — but  not  the  most  intensive 
cultivation — to  produce  food  of  different  kinds : 


FOOD  VALUE 
PER  POUND 
IN  CALORIES' 

POUNDS  PER 
ACRE  (Goon 
YIELD) 

CALORIES 
PER  ACRE 

RATIO  TO 
WHEAT  AS  BASIS 
(PER  CENT) 

Entire  wheat  flour  .... 
Native  beef  (as  purchased) 
Mutton  (as  purchased)    .     . 
Whole  milk     

1660 
1130 

1275 
•}2C 

1,  800 
2OO 
250 
4,OOO 

2,988,000 
226,OOO 

3l8'75° 
1,300,000 

IOO 

7 
1  1 

AT. 

Corn  meal  (unbolted)      .     . 
Oatmeal  ........ 

1550 
i860 

3,600 
1,  800 

5,580,000 
1,  748,000 

186 

112 

Rice    

16^0 

2,400 

7,QI2,OOO 

171 

Rye  meal  as  flour    .... 
Beans       
Potatoes       

1630 

!59° 

"?2? 

1,  800 
2,400 
24,000 

2,934,000 
3,8  1  6,000 
7,800,000 

98 

129 

260 

Sweet  potatoes    

480 

30,000 

14,400,000 

482 

Of  course  there  are  elements  of  food  value  other  than  the 
heat-producing  elements,  but  this  table  is  enough  to  indicate 
that  some  economy  of  land  could  be  effected  by  consuming 
other  and  more  heavy-yielding  crops  than  wheat  and  beef. 
Even  these  economies  of  land,  however,  might  be  gained  by  a 
less  economical  use  of  labor.  While  wheat  and  beef  require 
considerable  areas  of  land  for  their  most  economical  produc- 
tion, they  can  be  produced  with  comparatively  small  quantities 
of  labor  where  the  conditions  are  right.  On  our  Western  wheat 
farms,  for  example,  where  powerful  machinery  can  be  used,  a 
small  number  of  men  can  grow  and  harvest  a  very  large  acreage 
of  wheat.  On  our  Western  cattle  ranges  also  a  small  number  of 
men  can  care  for  large  numbers  of  cattle  pasturing  over  very 
wide  areas.  If  we  did  not  have  land  enough  for  these  purposes 
and  had  to  support  a  growing  population  from  our  own  soil, 
potatoes,  sweet  potatoes,  corn,  beans,  milk,  and  milk  prod- 
ucts in  the  form  of  butter  and  cheese  would  support  many 
more  people  than  could  be  supported  on  wheat  and  beef.  We 

1  From  Bulletin  28,  United  States  Department  of  Agriculture,  Office  of  Ex- 
periment Stations.  Government  Printing  Office,  1896. 


252  PRINCIPLES  OF  NATIONAL  ECONOMY 

must  bear  in  mind  also  that  vast  areas  comprising  more  than 
half  the  land  surface  of  the  globe  are  too  dry  for  anything  but 
grazing.  Their  only  possible  food  product  is  and  will  continue 
to  be  meat.  Considerable  quantities  of  reindeer  meat  can  also, 
it  is  now  believed,  be  grown  in  the  far-northern  regions  of 
America,  Europe,  and  Asia. 

The  banana  and  the  date.  Certain  tropical  countries  have 
great  advantages  in  the  way  of  food  production  on  small  areas. 
Concerning  the  banana  Humboldt  wrote:  "I  doubt  if  there 
exists  another  plant  on  the  globe,  which,  on  a  small  space  of 
ground,  can  produce  so  considerable  a  mass  of  nourishment. 
.  .  .  The  product  of  bananas  is  to  that  of  wheat  as  133 :  i ,  to  that 
of  potatoes  as  44:1."  In  Arabia  and  northern  Africa  the  date 
is  very  prolific  and  in  favorable  locations  produces  large  quan- 
tities of  food.1 

Turning  to  the  indoor  industries.  It  is  not  likely  to  be 
repeated  too  often  that  the  favorite  method  of  economizing 
land  and  supporting  a  large  population  is  to  give  up  trying  to  be 
physically  self-supporting  and  try  to  become  commercially  self- 
supporting.  By  being  physically  self-supporting  is  meant  pro- 
ducing from  our  own  soil  all  or  practically  all  that  we  need. 
By  becoming  commercially  self-supporting  is  meant  bringing 
in  the  products  of  the  soil  from  other  countries,  selling  to  those 
countries  in  return  the  products  of  the  mines  and  the  indoor 
industries.  The  products  of  the  indoor  industries  may  them- 
selves be  made  from  imported  raw  materials.  In  this  case  we 
bring  in  raw  materials,  work  them  up  into  finished  products, 
and  sell  them  again  to  outside  people,  living  ourselves  upon 
the  profits  of  the  transaction.  We  virtually  sell  our  labor  to 
other  nations. 

This  method  of  building  up  a  great  population  has  such  vast 
possibilities,  provided  we  are  so  situated  as  to  be  able  to  do  it, 
as  to  appeal  powerfully  to  the  imagination  of  statesmen  and 
nation-builders.  If  outside  markets  fail,  then  we  must  turn  to 

1  Cf.  Buckle,  History  of  Civilization  in  England,  chap.  xi.  London,  1857-1861. 


ECONOMIZING  LAND  253 

the  development  of  our  own  soil,  for  in  that  case  we  must  be- 
come physically  self-supporting. 

The  pent-up  versus  the  expanding  type  of  civilization.  Even 
though  we  aim  to  become  physically  self-supporting  we  have 
two  distinct  lines  of  development  open  to  us :  one  is  to  develop 
an  oriental,  or  pent-up,  type  of  civilization ;  the  other  is  to  de- 
velop an  occidental,  or  expanding,  type  of  civilization.  By  an 
oriental,  or  pent-up,  type  of  civilization  is  meant  one  in  which 
we  try  to  live  on  our  existing  area  of  land  and  to  support  a 
growing  population  without  adding  to  our  productive  area. 
This  leads  to  a  gradually  increasing  intensity  of  cultivation  and 
a  gradual  lowering  of  the  standard  of  living  of  those  who  work 
on  the  soil,  and  eventually  of  the  masses  of  the  people.  By 
an  occidental,  or  expanding,  type  of  civilization  is  meant  one 
in  which  the  effort  is  made  to  maintain  the  standard  of  living 
and  the  product  per  man  in  a  growing  population  by  widening 
our  cultivated  area  rather  than  by  cultivating  the  original  area 
more  intensively.  If  we  had  been  developing  a  pent-up  civiliza- 
tion we  should  never  have  spread,  say,  outside  of  the  original 
thirteen  states,  but  should  have  tried  to  support  our  increasing 
numbers  by  cultivating  the  soil  more  and  more  intensively. 
Indeed,  we  should  probably  not  have  left  Europe  in  the  first 
place,  unless  it  had  been  to  escape  persecution.  We  have  pre- 
ferred to  expand  over  more  land  rather  than  to  try  to  live  on 
the  original  area,  whatever  that  original  area  might  have  been. 
It  is  difficult  to  see  where  this  tendency  will  lead  us,  but  it  is 
a  rather  striking  fact  that  from  the  Greeks  down  to  the  nations 
of  the  present  every  great  European  nation  has  been  a  colonizing 
nation.  Thus  people  have  preferred  to  go  where  land  was  abun- 
dant rather  than  to  stay  where  population  was  dense.  Unless  we 
change  our  habit  very  decidedly  we  shall  try  to  maintain  our 
standard  of  living.  When  this  cannot  be  achieved  by  intensive 
cultivation  we  shall  swarm  or  send  out  colonists ;  that  is,  some 
people  will  emigrate.  The  only  alternative  would  be  the  main- 
tenance of  a  stationary  population  through  birth  control. 


254  PRINCIPLES  OF  NATIONAL  ECONOMY 

The  table  on  the  following  page  shows,  roughly,  the  area  of 
land  which  it  takes  to  produce,  under  fairly  good  agriculture, 
the  food  of  a  soldier  for  a  year. 

This  does  not  take  into  consideration  the  land  necessary  to 
clothe  him  or  to  feed  the  horses  which  are  used  to  cultivate  the 
land.  If  we  assume  that  an  average  family  of  five  persons  will 
consume  as  much  as  do  three  soldiers,  we  shall  conclude  that  it 
takes  nine  acres  to  produce  food  for  a  family.  Besides,  the  land 
must  grow  feed  for  the  horse  that  plows  and  cultivates  it.  Ac- 
cording to  the  United  States  Census,  in  the  great  farming  area 
of  the  upper  Mississippi  Valley  there  is  one  farm  horse  for  every 
thirteen  acres  under  cultivation.  If,  to  be  fairly  liberal,  one 
horse  is  sufficient  to  cultivate  on  the  average  fourteen  acres,  we 
might  conclude  that  one  horse  could  furnish  the  power  neces- 
sary to  cultivate  enough  land  to  grow  the  food  for  one  family 
(nine  acres)  and  for  himself  besides  (five  acres),  or  a  total 
of  fourteen. 

The  yields  assumed  in  the  table  on  page  255  are  not  unusu- 
ally large,  being  about  the  same  as  those  in  England  and  other 
well-cultivated  countries ;  but  they  are  about  twice  the  average 
yields  in  this  and  other  new  countries. 

One  very  important  part  of  the  problem  of  economizing  land 
is  that  of  preserving  and  improving  its  present  fertility.  This 
is  to  be  done  mainly  by  careful  management  of  the  soil.  Crop 
rotation,  a  proper  balance  between  plant-growing  and  animal 
husbandry  in  order  to  supply  natural  manure,  and  an  increased 
use  of  chemical  fertilizers  are  the  main  parts  of  a  policy  of  soil 
conservation.  How  important  an  item  natural  manure  is  in 
our  national  economy  may  be  shown  by  the  following  facts: 
It  has  been  conservatively  estimated1  that  the  value  of  the 
animal  manure  of  the  country  exceeds  two  billion  dollars 
($2,225,700,000).  This  is  greater  than  the  combined  value  of 
all  the  mineral  output  and  the  entire  timber  cut  of  the  country 
at  the  time  the  estimate  was  made.  If  one  third  of  this  is 
wasted,  it  amounts  to  a  sum  much  greater  than  the  value  of  the 

1  Farmers'  Bulletin  192,  p.  5,  United  States  Department  of  Agriculture. 


ECONOMIZING  LAND 


255 


STANDARD  RATION  FOR  UNITED  STATES  ARMY 


ARTICLES  CONSUMED' 

.OUNCES 

ETC. 

PER  DAY 

POUNDS 
PER  YEAR 

GOOD  YIELD 
IN  POUNDS 
PER  ACRE 

ACRES  REQUIRED 
TO  PRODUCE 
YEARLY  RATION 

Beef,  fresh    

2O. 

A  ^6.2  i; 

2OO 

2.28 

F'our     

18. 

410.6 

I,2OO 

.-34 

Baking  powder     

.08 

Beans    

2.4 

EC. 

2,400 

.022 

Potatoes    
Prunes       ... 

2O. 
1.28 

456.25 

2Q  "* 

I2,OOO 
"?,OOO 

.038 
.OOQ 

Coffee,  roasted  and  ground  .     . 
Sugar    

1.  12 

T.2 

25-5S 

71. 

4,8OO 

2,1:00 

.OO5 
.029 

Milk,  evaporated,  unsweetened 
Vinegar     

•5 
.i6gill 

ii-5 

14.6 

625 

7.OOO 

.018 
.OO4 

Salt  

.64  oz. 

Pepper,  black   

.04. 

Cinnamon     

.014 

Lard      

.64 

14.6 

7OO 

.048 

Butter  

.c 

ii.  1 

7C    ' 

.1  CT 

Sirup     

."?2  gill 

2Q.2 

2,E;OO 

.01 

Flavoring  extract,  lemon      .    . 

.014 

Total 

2.956 

(Roughly, 
3  acres) 

entire  timber  cut  of  the  country.  Clearly  the  conservation  of 
our  animal  manure  is  one  of  our  greatest  conservation  problems.2 
The  increasing  use  of  chemical  fertilizers,  however,  is  necessary 
if  we  are  to  make  increasing  drafts  upon  the  soil  in  order  to  feed 
our  increasing  population. 

1Cf.  "United  States  Army  Regulations,  1913"  (corrected  to  April  15,  1917), 
paragraph  1205,  p.  240.  Government  Printing  Office,  Washington,  1917. 

2 "The  Organization  of  a  Rural  Community,"  Yearbook  of  the  United  States 
Department  of  Agriculture,  1914. 


CHAPTER  XVII 
THE  BALANCING  OF  THE  FACTORS  OF  PRODUCTION 

Balanced  rations,  fertilizers,  etc.  Every  farmer  nowadays  is 
familiar  with  the  idea  of  a  balanced  ration  for  his  live  stock 
and  a  balanced  fertilizer  for  his  soil.  Students  of  human  dietet- 
ics also  are  familiar  with  the  idea  of  a  balanced  ration  for  man. 
By  a  balanced  ration  is  meant  one  which  contains  the  differ- 
ent food  elements  in  the  proportion  in  which  the  body  needs 
them.  By  a  balanced  fertilizer  is  meant  either  one  which  con- 
tains the  different  elements  of  plant  food  in  the  proportion  in 
which  plants  need  them,  or  one  which  will  balance  up  the 
soil  and  put  into  it  the  elements  of  plant  food  which  it  lacks. 
Thus,  a  soil  that  is  rich  in  nitrogen  but  deficient  in  potash 
would  need  a  fertilizer  that  was  particularly  rich  in  potash. 
Not  long  ago  the  writer  was  at  the  home  of  a  professor  of 
agriculture  in  one  of  our  leading  agricultural  colleges.  The 
grass  was  growing  up  between  the  bricks  in  the  sidewalk  in 
front  of  the  agriculturist's  house.  As  a  demonstration  he  was 
using  fertilizer  to  kill  the  grass.  It  was  excellent  fertilizer, 
and  in  the  proper  relation  it  would  have  made  the  grass  grow 
more  luxuriantly.  He  simply  put  on  too  much,  and  the  re- 
sult of  the  bad  balance  was  to  kill  the  grass.  In  addition  to 
those  elements  of  plant  food  which  ordinarily  go  into  the  fer- 
tilizer, moisture  and  other  factors  are  required.  If  there  is 
too  much  of  one  and  too  little  of  another  factor,  plants  will  not 
grow.  Everyone  is  familiar  with  the  fact  that  on  swampy  land 
plants  will  not  grow  because  there  is  too  much  water,  and  that 
on  desert  land  they  will  not  grow  because  there  is  too  little. 

Balanced  ingredients.  All  these  facts  are  mentioned  to  make 
it  perfectly  clear  to  the  student  that  in  almost  any  line  of 

256 


THE  BALANCING  OF  FACTORS  257 

production  the  question  of  the  balance  of  factors  is  a  very 
important  one.  All  the  factors  may  be  present,  but  if  they 
are  not  in  the  right  proportions,  production  will  be  reduced 
or  even  destroyed.  This  is  true  not  only  of  the  elements  of 
plant  and  animal  growth,  which  are  agents  of  production,  but 
of  tools,  implements,  raw  materials,  and  other  things  which 
enter  into  a  mechanical  industry.  In  the  manufacture  of  old- 
fashioned  gunpowder,  for  example,  charcoal,  saltpeter,  and  sul- 
phur were  required,  and  they  had  to  be  combined  in  fairly 
definite  proportions.  If  it  happened  that  there  was  more  char- 
coal on  the  market  than  would  combine  with  the  limited  supply 
of  one  of  the  other  ingredients,  say  saltpeter,  the  production  of 
gunpowder  was  limited  by  the  small  supply  of  saltpeter  and  not 
by  the  supply  of  charcoal.  Only  as  much  gunpowder  could  be 
manufactured  as  the  small  supply  of  saltpeter  would  permit. 
In  the  making  of  old-fashioned  mortar,  lime  and  sand  were  re- 
quired. Too  much  of  either  one  or  too  little  of  the  other  would 
spoil  the  mortar.  If  in  any  given  situation  there  should  happen 
to  be  a  scarcity  of  sand,  very  little  lime  could  be  used,  because 
only  as  much  mortar  could  be  made  as  the  limited  supply  of 
sand  would  permit.  Again,  however  abundant  both  lime  and 
sand  might  be  for  the  making  of  mortar,  if  brick  and  stone  were 
scarce,  very  little  mortar  could  be  used,  and  there  would,  there- 
fore, be  very  little  productive  demand  for  sand  and  lime. 

Balanced  agents  of  production.  This  principle  applies  not 
only  to  the  raw  materials  which  are  used  in  various  lines  of 
production  but  to  the  active  agents  themselves,  such  as  labor. 
However  numerous  the  hodcarriers  might  be,  if  there  were  a 
scarcity  of  brick  and  stone  masons  not  many  hodcarriers  could 
be  used.  The  farmer  who  had  plenty  of  land  and  tools,  but  no 
horses,  oxen,  or  tractors,  would  not  be  able  to  use  either  his 
land  or  his  tools  effectively.  If  he  could  not  raise  the  money 
in  any  other  way,  it  would  pay  him  to  sell  some  of  his  tools  or 
some  of  his  land  and  buy  horses  in  order  to  restore  the  balance. 
At  bottom  this  is  much  the  same  problem  as  that  of  balanc- 
ing rations  or  fertilizers.  Again,  however  much  land  he  might 


258  PRINCIPLES  OF  NATIONAL  ECONOMY 

possess,  if  he  lacked  equipment  his  farm  would  not  be  very 
productive.  It  would  pay  him,  if  he  could  not  raise  the  money 
in  any  other  way,  to  sell  some  of  his  land  in  order  to  buy  equip- 
ment of  various  kinds.  Some  of  our  frontier  farmers  found 
themselves  in  possession  of  a  soil  which  was  very  rich  in  plant 
food.  They  lacked,  however,  other  forms  of  capital,  or  the 
money  wherewith  to  purchase  building  materials,  machinery, 
live  stock,  etc.  Many  of  them  virtually  sold  their  surplus  soil ; 
that  is,  they  grew  such  crops  as  they  could,  sold  them,  and 
took  no  pains  to  replace  the  fertility  which  was  used  up  in  the 
growing  of  the  crops.  They  are  said  to  have  "mined  the  soil"; 
that  is  to  say,  as  the  miner  extracts  his  mineral  and  puts  noth- 
ing back,  so  many  of  these  frontier  farmers  extracted  plant 
food  and  put  nothing  back.  Whatever  may  be  said  of  this  from 
the  point  of  view  of  national  policy,  it  was,  under  the  circum- 
stances, undoubtedly  good  business  from  the  point  of  view  of 
the  farmer.  He  was  trying  to  balance  up  his  establishment. 
Having  an  abundance  of  plant  food  in  his  soil,  but  very  little  of 
anything  else,  he  found  it  to  his  advantage  to  sell  some  of  his 
plant  food  in  order  to  put  up  houses,  barns,  and  fences  and  pur- 
chase machinery  and  live  stock.  He  was  doing  virtually  the 
same  thing  that  another  farmer  would  do  who  found  himself 
in  the  possession  of  a  large  number  of  horses  and  no  plows  or 
harrows  to  which  to  hitch  his  teams.  It  would  pay  him  to  sell 
some  of  his  horses  and  buy  enough  equipment  to  make  the 
remaining  horses  productive. 

A  balanced  nation.  This  principle  of  balancing  up  the  factors 
of  production  is  just  as  important  for  the  nation  as  a  whole  as 
it  is  for  the  individual  farmer  or  manufacturer.  The  country 
which  possesses  a  surplus  of  land  and  a  scarcity  of  labor  will 
find  that  its  land  is  very  ineffectively  used.  What  it  needs  is 
more  labor.  It  cannot  very  well  sell  its  land,  but  it  will  in  all 
probability  pursue  a  policy  which  will  increase  its  labor  supply. 
Labor  under  such  conditions  will  be  in  great  demand,  and  for 
the  same  reason  that,  in  dietetics,  protein  will  be  in  great  de- 
mand if  it  is  scarce  while  the  other  food  elements  are  abundant. 


THE  BALANCING  OF  FACTORS  259 

In  such  a  community  land  is  certain  to  be  cheap  and  labor  dear. 
The  high  price  of  labor,  the  ease  with  which  men  can  establish 
themselves  on  the  land  as  independent  farmers  or  get  re- 
munerative work,  encourages  early  marriages  and  large  fam- 
ilies. This  is  especially  true  on  the  farms,  where  labor  is  scarce 
and  land  abundant.  Every  additional  child  is  money  in  the 
farmer's  pocket,  because  as  soon  as  the  child  is  old  enough  to 
work  he  helps  to  solve  the  ever-present  problem  of  scarcity  of 
labor.  Immigration  is  also  likely  to  be  encouraged  by  such 
a  country.  And  thus  from  two  sources  the  labor  supply  is 
increased  in  response  to  the  effort  to  balance  up  the  factors 
of  production. 

But  tools  and  equipment  of  all  kinds,  which  are  generally 
included  under  the  word  "capital,"  are  almost,  though  not 
quite,  as  essential  as  either  labor  or  land.  If  capital  is  scarce 
while  one  or  both  of  the  other  factors  are  abundant,  it  will  be 
in  great  demand,  for  the  same  reason  that  labor  is  in  great  de- 
mand where  it  is  scarce  and  land  is  abundant,  or  that  water  is 
in  great  demand  where  there  is  an  abundance  of  land  with  all 
the  elements  of  chemical  fertility,  but  a  scarcity  of  water.  An 
overpopulated  country,  on  the  other  hand,  finds  itself  with  a 
badly  balanced  industrial  system,  but  the  balance  is  in  this 
case  disturbed  in  the  opposite  direction.  Land  being  the  scarce 
factor,  every  acre  that  can  possibly  be  used  is  of  the  utmost  im- 
portance. Labor,  on  the  other  hand,  is  cheap.  It  can  easily 
be  spared.  If  it  sees  fit  to  migrate  to  other  countries,  no  great 
effort  is  made  to  prevent  it,  no  high  price  being  offered  it  as 
a  reward  for  staying  at  home.  Under  such  circumstances,  to 
hold  an  acre  of  land  out  of  use  would  seriously  reduce  the  total 
production  of  the  community. 

Balanced  capital.  As  on  the  farm  or  in  the  factory  we  saw 
that  different  kinds  of  tools  have  to  be  combined,  so  we  should 
find  that  different  kinds  of  capital,  or  tools,  have  to  be  combined 
in  the  nation  at  large.  If,  for  any  reason,  the  country  should 
find  an  oversupply  of  one  class  of  tools,  say  agricultural  im- 
plements, and  an  undersupply  of  another  class  of  tools,  say 


260  PRINCIPLES  OF  NATIONAL  ECONOMY 

railroads  and  rolling  stock,  the  productive  power  of  the  whole 
nation  would  be  limited  by  the  deficiency  of  transportation 
facilities.  However  much  might  be  produced  with  the  agri- 
cultural implements,  if  it  could  not  be  transported  to  market, 
it  would  be  of  little  use.  This  would  be  a  case  of  a  badly 
balanced  national  capital.  The  result  would  be  that  the  indus- 
trial system,  if  it  were  a  good  system,  would  find  some  way  to 
restore  the  balance.  It  would  be  poor  economy,  under  such 
circumstances,  to  increase  the  production  of  agricultural  ma- 
chinery. That  would  add  very  little  to  the  total  producing 
power  of  the  nation.  If  something  could  be  added  to  the 
transportation  facilities,  that  would  add  considerably  to  the  pro- 
ductive power  of  the  nation.  Under  a  well-organized  industrial 
system  the  readjustment  takes  place  automatically.  Farm  im- 
plements become  cheap.  Farmers  do  not  care  to  buy  any 
more,  and  the  manufacturers  are  discouraged  from  production. 
Railroad  building,  however,  is  stimulated  by  the  high  earn- 
ings of  the  existing  railroads;  and  the  productive  energy  of 
the  community  is  diverted  from  the  manufacture  of  agricul- 
tural implements  to  the  building  of  railroads  and  the  manu- 
facture of  railroad  equipment. 

If  we  reverse  the  supposition  of  course  we  get  the  opposite 
results,  but  the  same  principles  will  be  at  work.  If  we  should 
find  an  overabundance  of  railroad  facilities  and  a  scarcity 
of  agricultural  implements,  then  it  would  be  to  the  interest  of 
the  country  to  have  more  agricultural  implements.  If  the 
existing  transportation  facilities  could  easily  carry  all  that 
the  farms  produce  and  more  too,  little  would  be  added  to  the 
national  product  by  building  more  railroads,  and  much  could 
be  added  by  manufacturing  more  farm  equipment  and  increas- 
ing the  growth  of  crops.  The  low  earnings  of  railroads  and  the 
increased  demand  for  farm  machinery  would  tend  to  divert 
the  productive  power  of  the  nation  from  railroad  building  to 
the  manufacture  of  farm  implements  and  the  use  of  them 
on  the  farms. 


THE  BALANCING  OF  FACTORS  261 

This  principle  is  of  universal  application,  and  thousands 
of  illustrations  could  be  multiplied  if  it  were  necessary.  If  we 
apply  it  to  the  railroads  themselves,  we  find  it  working  in  the 
utmost  detail.  When  a  railway  system  does  not  have  rolling 
stock  enough  to  utilize  its  tracks  its  capital  is  badly  balanced, 
and  naturally  the  thing  to  do  is  to  get  more  rolling  stock  and 
more  freight,  in  order  to  utilize  the  trackage  advantageously. 
In  other  cases  the  road  may  find  itself  with  more  rolling  stock 
and  more  business  than  can  be  done  effectively  on  its  existing 
trackage.  It  must  then  begin  adding  to  its  trackage  rather 
than  to  its  rolling  stock,  in  order  to  restore  the  balance. 

The  fundamental  problem  of  scientific  management.  The 
fundamental  problem  of  all  management,  whether  it  be  that 
of  a  diet  kitchen,  a  farmer's  feeding  lot,  a  farm  as  a  whole, 
a  factory,  a  railroad,  or  a  nation,  is  the  problem  of  balanc- 
ing the  factors  of  production.  The  problem  of  managing  the 
nation  is  commonly  called  the  problem  of  statesmanship,  and 
the  fundamental  problem  of  all  statesmanship  is  that  of  bal- 
ancing the  factors  of  national  life.  To  have  so  much  produc- 
tive power  as  to  tempt  barbarians  from  the  outside  to  invade 
and  rob,  and  so  little  military  defense  as  to  be  unable  to 
repel  barbaric  invasions,  is  to  invite  national  disaster.  On  the 
other  hand,  to  maintain  so  large  a  fighting-machine  as  to  in- 
terfere seriously  with  the  work  of  production  is  also  bad  states- 
manship, because  it  preserves  a  bad  balance  of  the  factors  of 
national  life  and  prosperity.  To  encourage  immigration  and 
the  multiplication  of  numbers  beyond  the  point  necessary  to 
utilize  the  land  effectively  also  produces  an  unbalanced  situa- 
tion. To  discourage  immigration  or  the  multiplication  of 
numbers  to  such  an  extent  as  to  leave  the  land  inadequately 
utilized  is  equally  bad. 

A  balanced  population.  The  greatest  danger  of  all,  however, 
and  the  one  which,  apparently,  is  least  appreciated  by  some  of 
our  statesmen,  is  that  of  producing  a  badly  balanced  popula- 
tion. At  the  beginning  of  this  chapter  the  question  of  the 


262  PRINCIPLES  OF  NATIONAL  ECONOMY 

balancing  of  the  hodcarriers  and  the  brick  and  stone  masons 
was  mentioned.  This  may  be  taken  as  typical  of  the  neces- 
sity of  balancing  skilled  labor  and  unskilled  labor.  To  have 
more  unskilled  labor  than  can  be  used  effectively  with  the 
limited  supply  of  skilled  labor  is  quite  as  bad  as  to  have  more 
people  than  can  be  supported  on  the  land  or  fewer  people  than 
are  necessary  to  utilize  the  land.  To  have  more  manual  labor 
than  will  combine  effectively  with  mental  labor,  to  have  more 
mental  laborers  who  are  capable  of  doing  only  routine  work 
than  will  combine  effectively  with  those  mental  laborers  who 
possess  originality,  inventiveness,  and  the  power  of  leadership, 
is  also  to  produce  a  bad  balance. 

Probably  the  most  important  of  all  problems  of  statesman- 
ship, and  at  the  same  time  one  of  the  most  difficult,  is  that  of 
balancing  the  population  so  that  no  particular  class  of  labor 
is  either  oversupplied  or  undersupplied  with  respect  to  any 
other  class.  One  method  of  preserving  the  balance  is  by  educa- 
tion and  vocational  guidance.  Training  men  for  the  occupa- 
tions where  men  are  needed,  as  evidenced  by  the  high  wages 
and  salaries  paid,  is  one  of  the  quickest  and  most  effective  ways 
of  preserving  the  balance.  Whenever  any  occupation  is  so 
undermanned  as  to  make  it  difficult  to  find  workers,  wages  or 
salaries  will  tend  to  rise.  This  increase  in  remuneration  is  then 
a  standing  invitation  to  young  men  to  prepare  themselves  for 
that  work,  and  a  properly  conducted  educational  system  is  a 
standing  opportunity  to  young  people  to  prepare  themselves  to 
accept  the  invitation. 

Differential  rates  of  multiplication.  A  wholesome  moral  life 
would  also  be  a  powerful  agency  working  in  the  same  direction. 
Those  who  have  demonstrated  that  they  are  needed,  by  the  fact 
that  they  can  fill  good  positions  for  which  there  is  a  demand 
and  for  which  high  wages  and  salaries  are  offered,  are  the  ones 
who  ought  to  reproduce  their  kind  most  abundantly.  Unfor- 
tunately, in  most  modern  communities,  they  are  the  very  peo- 
ple who  multiply  least  rapidly.  On  the  other  hand,  those  who 
have  demonstrated  that  they  are  more  or  less  superfluous  be- 


THE  BALANCING  OF  FACTORS  263 

cause  they  can  do  only  a  kind  of  work  which  is  oversupplied, 
and  who  therefore  find  difficulty  in  getting  work  at  all  and  can 
earn  only  low  wages  when  they  do  get  it,  ought,  from  the  stand- 
point of  a  balanced  population,  to  multiply  least  rapidly.  Un- 
fortunately they  are  frequently  the  very  people  who  multiply 
most  rapidly.  This  differential  rate  of  multiplication  helps  to 
perpetuate  a  badly  balanced  population  in  spite  of  all  the  efforts 
of  the  schools  toward  an  occupational  redistribution  of  popula- 
tion and  a  restoration  of  the  balance. 

Geographical  redistribution  of  population.  That  more  land  is 
better  for  a  growing  population  than  less  land  is  the  theory 
according  to  which  a  great  deal  of  the  history  of  the  world  has 
been  constructed.  The  migration  of  peoples  in  search  of  more 
land  is  one  of  the  large  aspects  of  human  history.  There  could 
be  no  possible  object  in  seeking  more  land,  instead  of  remaining 
content  with  the  land  already  in  the  possession  of  the  people, 
were  it  not  for  the  fact  of  diminishing  returns.  Therefore  a 
very  discriminating  writer1  has  stated  the  opinion  that  the  law 
of  decreasing  returns  is  the  fundamental  fact  of  human  history. 
The  effort  of  a  growing  population  to  acquire  more  land  is,  from 
the  standpoint  of  the  present  chapter,  merely  an  effort  to  restore 
the  balance  between  factors  of  production.  In  any  given  state 
of  civilization  too  dense  a  population  (that  is,  too  much  labor 
and  too  little  land)  works  to  the  disadvantage  of  the  people. 
When  they  begin  to  perceive  that  they  would  be  better  off  if 
they  had  more  land,  nothing  except  a  strong  military  guard  or 
a  Chinese  wall  will  prevent  emigration. 

Migration  of  capital.  But  capital  follows  the  same  law  as 
population.  In  a  community  where  the  land  and  labor  are  not 
properly  balanced  with  an  adequate  supply  of  capital,  the 
perception  of  a  need  for  more  capital  (that  is,  tools  and  equip- 
ment) is  likely  to  be  pretty  clear  and  definite.  This  leads  to 
the  offer  of  high  rates  of  interest  as  an  inducement  to  capital 
to  migrate  from  other  communities  where  it  is  abundant  in  order 

1  Edward  Van  Dyke  Robinson,  "War  and  Economics,"  Political  Science 
Quarterly,  Vol.  XV,  pp.  581-622. 


264  PRINCIPLES  OF  NATIONAL  ECONOMY 

to  supply  those  communities  where  it  is  scarce.  The  possibility 
of  using  each  and  every  unit  of  capital  advantageously  is  what 
enables  borrowers  to  pay  the  high  rate  of  interest.  The  scarcity 
of  capital  relatively  to  other  factors  is  what  creates  the  oppor- 
tunity for  advantageous  use  of  capital.  The  formula  "More 
capital,  more  product ;  less  capital,  less  product"  is  appreciated 
with  peculiar  vividness.  This  appreciation  leads  to  active  bid- 
ding for  capital,  and  this  to  the  offer  of  high  rates  of  interest. 
The  fortunate  individual  who  can  gain  possession  of  an  addi- 
tional fund  of  capital,  being  able  to  increase  his  product  con- 
siderably, finds  it  economical  to  pay  a  high  rate  of  interest  for 
it.  If  he  has  capital  of  his  own,  whereas  his  competitors  in  pro- 
duction lack  capital,  he  will  have  a  great  advantage  over  them 
and  will,  therefore,  secure  a  large  income.  According  to  our 
analysis  in  Chapter  XXXVIII,  this  additional  income  which 
he  gets  from  the  use  of  his  own  capital  is  interest  as  truly 
as  the  income  which  he  gets  from  lending  his  capital  to 
someone  else. 

COLLATERAL  READING 

MILL,  JOHN  STUART.  Principles  of  Political  Economy,  Book  I,  chaps,  vii, 
viii,  and  ix.  New  York,  1893. 

SMITH,  ADAM.  The  Wealth  of  Nations,  Book  I,  chaps,  i,  ii,  and  iii,  and 
Book  III.  Oxford,  1880.  (Valuable  not  only  as  a  classic  but  also  as  showing 
the  author's  point  of  approach  to  the  question  of  national  prosperity.) 

TAUSSIG,  F.  W.  Principles  of  Economics,  Book  I.  New  York,  1911. 
(A  comprehensive  discussion  of  the  organization  of  productive  forces.) 


PART  III.    THE  PRODUCTIVE  INDUSTRIES 


CHAPTER  XVIII 
THE    EXTRACTIVE  INDUSTRIES 

Ways  of  acquiring  wealth.  In  the  diagram  in  the  chapter  on 
Economic  Activities  the  ways  of  acquiring  wealth  are  divided 
into  two  main  classes,  the  uneconomical  and  the  economical. 
It  was  also  pointed  out  that  from  the  social  or  national  point  of 
view  it  is  uneconomical  to  have  men  acquiring  wealth  by 
methods  which  do  not  add  to  the  total  wealth  or  well-being 
of  the  society  or  the  nation.  The  economical  ways  of  getting 
a  living  were  further  subdivided  into  three  classes:  the  pri- 
mary industries,  the  secondary  industries,  and  professional  and 
personal  service. 

The  primary  industries.  The  primary  industries  are  them- 
selves subdivided  into  two  classes,  the  extractive  and  the  genetic. 
Extractive  industries  are  those  which  merely  appropriate  nat- 
ural objects  without  any  attempt  to  replace  what  is  taken  or 
to  keep  up  and  increase  the  supply.  The  genetic  industries, 
which  might  almost  be  called  creative,  are  those  primary  indus- 
tries which  make  a  conscious  effort  to  replace  that  which  is 
taken  and  to  increase  the  supply.  Thus,  hunting  wild  animals 
and  grazing  domesticated  animals  on  free  ranges  are  extractive, 
whereas  tillage  and  stock-breeding  are  genetic.  Lumbering  or 
cutting  timber  in  a  natural  forest  is  extractive,  whereas  forestry, 
the  scientific  growing  of  timber,  is  genetic.  Mining  is  extrac- 
tive. There  does  not  seem  to  be  any  genetic  industry  which 
bears  the  same  relation  to  it  as  fish  culture  bears  to  fishing,  or 
forestry  to  lumbering. 

Hunting.  Of  all  industries  hunting  is  the  most  primitive.  It 
was  sometimes  combined  with  fishing  as  a  means  of  subsistence. 
It  usually  included  the  search  for  edible  fruits,  nuts,  and  vege- 

267 


268  PRINCIPLES  OF  NATIONAL  ECONOMY 

tables,  as  well  as  the  killing  of  animals,  and  it  sometimes  even 
degenerated  into  a  man  hunt ;  that  is,  the  hunting,  killing,  and 
robbing  of  men.  Where  animals  constituted  the  most  abundant 
source  of  food,  primitive  men  quite  naturally  hunted  animals. 
Where  fruits,  nuts,  and  edible  roots  were  abundant  it  was  not 
uncommon  for  the  search  for  these  foods  to  become  the  chief 
occupation.  The  hunting  of  animals  led  naturally  to  domesti- 
cation and  herding,  and  the  search  for  fruits  and  herbs  led 
quite  as  naturally  to  horticulture,  as  the  next  stage  in  industrial 
development.  Our  own  primitive  ancestors  seem  to  have  been 
hunters,  and  later  herdsmen,  before  they  took  up  agriculture. 
The  North  American  Indians  lived  mainly  by  hunting  animals, 
though  they  had  taken  to  the  cultivation  of  crops  on  a  small 
scale.  They  seem  not  to  have  domesticated  any  animal  except 
the  dog,  before  the  coming  of  the  white  man.  This  direct  pas- 
sage from  hunting  to  tillage,  without  an  intermediate  stage  of 
herding,  is  considered  somewhat  exceptional.  The  ancient  Peru- 
vians had  domesticated  the  llama  and  the  alpaca.  The  ancient 
Mexicans  had  become  horticulturists  apparently  without  hav- 
ing been  herdsmen  at  all ;  their  primitive  hunting  seems  to  have 
consisted  mainly  in  searching  for  fruits  and  herbs  rather  than 
for  animals. 

Hunting,  which  includes  trapping,  has  played  an  important 
part  and  still  plays  an  appreciable  part  in  our  national  economy. 
The  abundance  of  game  on  our  Western  frontiers,  when  we  had 
a  frontier,  was  an  important  source  of  food  for  the  advance 
army  of  settlers.  The  emigrants  who  crossed  the  Great  Plains 
in  the  early  settlement  of  the  Pacific  coast  also  benefited  to  a 
certain  extent  from  the  herds  of  buffalo,  deer,  elk,  and  antelope 
which  at  one  time  abounded.  More  important,  however,  was 
the  regular  business  of  trapping  fur-bearing  animals  and  of 
trading  with  the  Indians  for  the  skins  and  furs  which  they  col- 
lected. A  great  deal  of  the  history  of  our  frontier,  beginning 
with  the  first  settlements  on  the  Atlantic  coast  and  continuing 
across  the  continent,  has  been  a  history  of  the  fur  trade.  Rela- 
tively to  her  size  and  her  other  industries,  the  fur  trade  has  been 


THE  EXTRACTIVE  INDUSTRIES  269 

even  more  important  in  Canada  than  in  the  United  States. 
Great  companies,  such  as  the  Hudson  Bay  Company  and  the 
Northwest  Company  of  Merchants  of  Canada,  were  organized 
which,  especially  during  the  eighteenth  and  early  nineteenth 
centuries,  swayed  the  destinies  of  that  country  and  parts  of  our 
own  Northwest.  They  maintained  numerous  trading-posts  and 
employed  thousands  of  men,  who  explored  every  nook  and 
corner  of  the  territory  over  which  they  operated.  Similar 
though  smaller  companies  were  formed  within  the  United  States 
to  trade  with  our  own  Indians.  Many  of  our  Western  pioneers, 
guides,  and  scouts,  of  whom  Kit  Carson  was  the  most  famous, 
began  their  careers  as  hunters  and  trappers  for  these  various 
companies.  The  story  of  their  adventures  adds  a  romantic 
element  to  the  early  history  of  our  Far  West,  but  they  were 
making  their  living  by  gathering  furs  to  supply  the  demands 
of  commerce. 

After  the  building  of  the  transcontinental  railroads  across 
the  great  Western  plains  a  rich  harvest  of  buffalo  skins  was 
reaped  for  a  few  brief  years.  The  lamentable  result  was  that 
the  buffaloes,  or  bison  (as  they  are  more  properly  named), 
which  had  roamed  in  countless  numbers  over  those  plains,  were 
almost  exterminated  in  the  two  decades  from  1870  to  1890. 
It  is  doubtful  whether  such  a  slaughter  of  noble  animals  had 
ever  taken  place  before  in  the  history  of  the  world. 

As  the  country  has  become  settled,  fur-bearing  animals,  as 
well  as  other  wild  animals  whose  skins  form  articles  of  com- 
merce, have  tended  to  grow  scarcer,  though  no  such  wholesale 
destruction  has  overtaken  any  of  the  others  (except  the  beaver) 
as  that  which  overtook  the  buffalo.  Most  of  them  are  small 
enough  to  find  cover  and  sustenance  for  small  numbers  in  the 
woods  and  fields  of  settled  communities.  Therefore  hunting 
and  trapping  still  supply  a  small  fraction  of  our  national  in- 
come. The  most  valuable  of  all  our  inland  fur-bearing  animals, 
the  beaver,  has  almost  disappeared,  along  with  the  buffalo ; 
but  minks,  muskrats,  raccoons,  opossums,  skunks,  foxes,  and 
coyotes  are  still  found  in  small  numbers.  The  subarctic  regions 


270  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  northern  Canada  and  Alaska  still  yield  considerable  harvests 
of  furs,  while  the  seals  which  congregate  in  the  Bering  Sea,  if 
adequately  protected,  may  prove  a  valuable  national  asset. 

Fishing.  While  hunting,  as  a  source  of  national  wealth,  tends 
to  decline  in  importance  as  the  country  develops,  fishing  seems 
to  increase.  One  reason  for  the  decline  of  hunting  is  the  simple 
fact  that  land  becomes  too  valuable  for  other  purposes  to  be 
allowed  to  remain  in  its  wild  state  as  a  refuge  or  feeding-ground 
for  wild  animals.  When  it  is  turned  to  other  purposes  most  of 
these  animals  must  of  necessity  disappear.  The  same  is  ap- 
parently true  of  many  inland  streams  which  once  furnished 
small  quantities  of  fish.  But  the  larger  lakes  and,  especially, 
the  oceans  furnish  an  almost  inexhaustible  quantity  of  excellent 
food.  As  population  and  the  demand  for  food  increase,  the  har- 
vest of  the  sea  assumes  a  more  and  more  important  part  in  our 
national  economy.  According  to  the  last  estimate  of  the  Fed- 
eral Census  there  were  in  the  United  States,  including  Alaska, 
7347  vessels  engaged  in  the  fishing  industry,  166,343  per- 
sons were  employed,  and  the  total  value  of  the  product  was 
$75,029,973.  The  total  value  of  the  fisheries  of  the  world  is 
estimated  at  something  over  $480,000,000. 

We  have  as  yet  scarcely  begun  to  realize  the  possibilities  of 
this  harvest  of  the  sea.  Practically  every  fish  which  lives  in 
these  northern  waters  is  good  for  food  if  properly  prepared. 
Every  decade  we  are  discovering  that  some  variety  which  has 
formerly  been  rejected  is  quite  as  good  as  any  that  we  have 
hitherto  prized.  Thus  far  we  have  chosen  only  a  few  of  the 
many  varieties  with  which  the  sea  abounds. 

Pasturage.  It  would  be  impossible  to  estimate  how  much  the 
civilized  races  of  the  north-temperate  zone  owe  to  such  domestic 
animals  as  the  horse,  the  ass,  the  cow,  the  sheep,  the  goat,  and 
the  pig.  All  these  animals  have,  at  one  time  or  another,  fur- 
nished food  for  man.  The  horse,  the  ox,  and  the  ass  have 
furnished  that  which  has  played  almost  as  important  a  part  as 
food  in  man's  conquest  of  nature ;  namely,  power.  Before 
steam  and  electricity  had  been  harnessed,  or  water  power  devel- 


THE  EXTRACTIVE  INDUSTRIES  271 

oped,  these  animals  were  almost  the  only  source  of  power  be- 
sides human  muscles.  The  skins  of  all  were  and  are  still 
utilized,  there  being  no  very  good  substitute  for  leather  even  to 
this  day.  The  cow  and  the  goat  have  furnished  and  still  furnish 
milk,  one  of  our  most  important  articles  of  diet.  The  wool  of 
the  sheep  is  even  now,  next  to  cotton,  the  most  important 
material  for  the  manufacture  of  clothing. 

In  their  native  state  all  these  animals  except  the  pig  lived 
almost  exclusively  upon  grass,  either  green  or  dried  in  the  form 
of  hay,  and  they  still  depend  mainly  upon  it.  Even  the  pig, 
with  his  omnivorous  appetite  and  his  accommodating  stomach, 
will  thrive  on  grass  as  his  chief  article  of  diet,  though  he  needs 
some  more  concentrated  food  in  addition  if  he  is  to  make  his 
best  growth.  Grass  and  grazing  have  therefore  played  a  very 
important  part  in  the  economic  life  of  that  branch  of  the  human 
race  from  which  we  are  derived.  Our  ancestors  were  already 
herdsmen  before  they  emerged  from  prehistoric  darkness.  All 
the  animals  now  under  domestication  and  all  the  fowls,  except 
the  turkey,  were  domesticated  so  long  ago  that  we  have  no 
record  as  to  where  or  when  it  occurred.  It  may  give  us  a  new 
respect  for  those  prehistoric  ancestors  of  ours  when  we  reflect 
that  we  have  never  succeeded  in  thoroughly  domesticating  any 
animal  since  we  have  had  a  history,  though  we  may  soon  suc- 
ceed with  the  zebra.  There  has  never  been  a  period  of  which 
we  have  any  record  from  the  earliest  times  to  the  present  when 
our  branch  of  the  human  race  did  not  depend  for  its  subsistence 
largely  upon  the  grazing  animals.  During  the  greater  part  of 
our  historic  life  our  domestic  animals  grazed  on  wild  or  native 
grasses.  Feeding  them  upon  cultivated  grasses  and  grains  will 
be  discussed  under  Agriculture. 

Grazing  on  our  Western  frontier.  From  the  earliest  settle- 
ments in  the  territory  now  occupied  by  the  United  States, 
grazing  has  been  an  important  industry.  Following  closely  in 
the  wake  of  the  hunters,  trappers,  and  fur-traders  and  in  ad- 
vance of  the  farmers  have  gone  the  herdsmen.  The  wild  grasses 
furnished  a  ready  source  of  income  to  the  man  who  possessed 


272  PRINCIPLES  OF  NATIONAL  ECONOMY 

animals  capable  of  turning  them  into  salable  products.  The 
frontier  settlements  of  colonial  New  England  possessed  large 
herds  of  cattle,  and  down  to  1820  beef  was  one  of  the  principal 
exports.  Hogs  ran  wild  in  the  woods  and,  living  as  they  did  on 
roots  and  mast,  furnished  an  abundant  supply  of  meat.  Horses 
were  exported  in  considerable  numbers.  After  the  danger  from 
wolves  had  been  reduced,  sheep  were  grown  in  large  numbers. 
In  Virginia  and  the  Carolinas  grazing  developed  even  more 
rapidly.  The  cattlemen  had  their  brands  registered,  they  or- 
ganized round-ups,  and  they  carried  on  the  business  very  much 
as  it  was  carried  on  in  the  Far  West  in  the  seventies  and  eighties 
of  the  last  century. 

The  herdsmen  continued  to  move  westward  in  advance  of  the 
more  permanent  settlements,  but  the  farmers  who  plowed  the 
land  and  harvested  crops  kept  many  animals  to  graze  upon 
the  native  grasses  which  still  flourished  upon  the  unbroken 
lands.  Before  the  building  of  the  railroads  great  herds  of  cattle, 
sheep,  and  hogs  were  driven  sometimes  hundreds  of  miles  to 
market  in  the  cities  of  the  Atlantic  coast.  A  hog  which  could 
not  transport  itself  to  market  was  not  of  much  value ;  conse- 
quently not  much  attention  was  given  to  the  breeding  of  the 
short-legged,  barrel-shaped  hog  of  the  present  day.  The  cattle, 
likewise,  were  built  more  for  traveling  than  for  meat.  The  oxen 
of  that  period,  which  were  preferred  to  horses  for  heavy  farm 
work,  were  well  adapted  to  that  purpose. 

When  the  advance  waves  of  settlement  reached  the  great 
prairies  of  the  West  the  grazing  industry  entered  a  new  phase. 
Those  natural  meadows  of  vast  extent  furnished  a  much  more 
abundant  pasturage  than  had  the  great  forest  which  extended 
almost  unbroken  from  the  Atlantic  coast  to  western  Ohio  in  the 
central  part  of  the  country  and  to  the  Mississippi  River  and 
beyond  on  the  north  and  south.  Goats  and  asses  had  never 
figured  largely  among  the  domestic  animals  of  this  country, 
but  horses,  cattle,  sheep,  and  hogs  multiplied  rapidly.  On 
these  Western  prairies — the  former  home  of  countless  herds  of 
buffalo,  deer,  elk,  and  antelope,  all  of  which  were  grazing  ani- 


THE  EXTRACTIVE  INDUSTRIES  273 

• 

mals — cattle  and  sheep  were  very  economically  produced  and 
would  have  been  enormously  profitable  had  not  the  prices  of 
beef,  mutton,  and  wool  fallen  so  low  as  barely  to  cover  the  low 
cost  of  production.  Dwellers  in  Eastern  cities  enjoyed  abnor- 
mally cheap  meat  and  continued  to  do  so  until  the  very  end  of 
the  nineteenth  century ;  since  that  time  meat  prices  have  been 
gradually  approaching  a  normal  level  again. 

The  Texas  cattle  trail.  After  the  close  of  the  Civil  War  the 
grazing  industry  entered  still  another  phase.  Vast  herds  of 
cattle,  brought  by  the  early  Spanish  settlers,  had  long  roamed 
the  plains  of  Mexico  and  Texas.  After  Texas  entered  the  United 
States  the  grazing  industry  developed  rapidly  under  the  en- 
ergetic management  of  American  cattlemen.  Texas  cattle  be- 
gan to  enter  the  markets  of  the  North  and  East.  The  Civil 
War  put  a  stop  to  this  for  a  time.  At  the  close  of  the  war  the 
Texas  ranges  were  swarming  with  cattle.  They  soon  began 
to  move  northward  in  search  of  more  pasture  as  well  as  better 
markets.  This  drift  northward  followed,  in  the  main,  the 
western  edge  of  the  settlements ;  and  the  route  came  to  be 
known  as  the  Texas  Cattle  Trail.  As  settlements  extended 
westward  the  trail  necessarily  moved  westward  also. 

By  this  time  the  northern  ranges  were  all  west  of  the  Missis- 
sippi River  and  were  soon  confined  to  the  Great  Plains. 
Farming  on  these  plains  was  slow  in  development  because  of 
the  insufficient  rainfall.  Therefore  the  tide  of  westward  set- 
tlement was  so  retarded  as  to  permit  a  considerable  develop- 
ment of  what  came  to  be  called  cattle-ranching.  The  grazing 
industry  was  given  more  time  in  which  to  develop  systemati- 
cally. It  was  less  transitory  than  it  had  been  on  the  rapidly 
moving  frontier  of  earlier  times.  It  still  survives  over  con- 
siderable areas  of  the  arid  West  (that  is,  west  of  the  one 
hundred  and  second  meridian),  though  it  is  becoming  more 
restricted  through  the  gradual  settlement  of  the  better  lands 
by  farmers.  Nearly  half  the  beef  cattle  and  more  than  half 
the  sheep  of  the  United  States  are  grown  on  these  ranges, 
though  many  of  the  animals  raised  there  are  afterwards  fat- 


274  PRINCIPLES  OF  NATIONAL  ECONOMY 

tened  in  what  is  known  as  the  Corn  Belt ;  that  is,  the  country 
in  which  Indian  corn  is  the  leading  crop.  This  belt  extends 
from  Ohio  westward  beyond  the  Missouri  River,  roughly  to 
the  ninety-eighth  meridian.  Considerable  numbers  of  horses 
also  are  grown  on  these  ranges,  but  most  of  them  are  grown  on 
the  farms  farther  east.  Goats  also  have  increased  on  some  of 
the  southwestern  ranges,  though  they  have  never  played  a  very 
important  role  in  our  national  economy. 

Lumbering.  Next  to  grass  the  most  valuable  natural  product 
of  the  soil  is  timber.  It  might  occupy  first  place  if  the  value  of 
the  native  timber  standing  at  a  given  time  were  compared  with 
the  value  of  the  native  grass  standing  at  the  same  time.  The 
proper  basis  of  comparison,  however,  is  the  annual  growth  of 
the  two  products  on  soil  equally  good  for  either.  Though  this 
is  sometimes  called  the  Age  of  Steel,  wood  is  still  an  important 
and  almost  indispensable  material. 

The  first  settlers  on  our  Atlantic  seaboard  found  a  dense  and 
apparently  limitless  forest  extending  from  the  coast  westward. 
It  was  not  until  well  into  the  nineteenth  century  that  the  ad- 
vance guard  of  the  army  of  Western  migration  began  to  emerge 
from  this  forest  onto  the  great  prairies  of  the  West.  Timber 
was  so  abundant  as  scarcely  to  be  considered  an  economic 
good.  Certainly  the  settlers  had  little  occasion  to  economize 
it.  The  best  of  it  they  used  rather  lavishly;  the  rest  they 
destroyed  in  order  that  they  might  use  the  land  for  things 
which  they  needed  more  than  they  needed  timber.  Along 
the  northern  tier  of  states  the  great  forest  extended  as  far 
west  as  Minnesota.  In  the  middle  strip  the  prairies  began  in 
parts  of  northern  Indiana.  Farther  south  the  forest  followed 
the  Ohio  valley  to  the  Mississippi  and  extended  beyond  through 
central  and  southern  Missouri,  Arkansas,  and  Louisiana  into 
portions  of  eastern  Kansas,  Oklahoma,  and  Texas.  Other  for- 
ests were  found  in  the  high  mountains  of  the  West,  but  the 
finest  of  all  were  found  in  the  region  of  Puget  Sound  in  our 
extreme  Northwest. 


THE  EXTRACTIVE  INDUSTRIES  275 

After  the  first  onslaught  of  the  settlers,  who  were  bent  on 
getting  rid  of  the  timber  in  order  to  clear  the  land  for  cultiva- 
tion, lumbering  became  a  regular  business  in  every  part  of  our 
forested  area.  Its  greatest  development  was  in  lands  which 
were  not  the  most  valuable  for  agricultural  purposes.  Along 
our  northern  border,  where  the  climate  was  somewhat  severe 
and  where  the  soil  was  rather  light  and  sandy,  the  timber  was 
not  destroyed  in  order  to  clear  the  land,  because  better  lands 
were  available  farther  south.  When  the  timber  of  this  northern 
strip  came  to  have  a  commercial  value  this  region  became  the 
scene  of  lumbering  on  a  large  scale.  Large  companies  were 
formed,  thousands  of  men  were  employed,  and  great  fortunes 
were  made.  Lumbering  in  this  region,  particularly  along  the 
Great  Lakes  and  the  upper  tributaries  of  the  Mississippi  River 
(that  is,  in  the  states  of  Michigan,  Wisconsin,  and  Minnesota, 
where  water  transportation  was  cheap),  developed  rapidly  dur- 
ing the  latter  half  of  the  nineteenth  century  and  then  declined 
rapidly.  A  similar  development  took  place  in  the  Southern 
states.  Here  the  greatest  activity  was  along  the  southern  coast, 
just  outside  of  the  Cotton  Belt ;  that  is,  on  land  which  was  not 
cleared  primarily  for  the  purpose  of  growing  cotton,  but  where 
the  timber  was  left  standing  until  it  had  acquired  a  commercial 
value  through  the  increased  demand  and  the  improvement  of 
transportation  facilities.  The  most  valuable  timber  tree  of  this 
belt  was  the  yellow  pine,  as  the  white  pine  had  been  in  the  case 
of  the  northern  belt. 

Lumbering,  however,  has  by  no  means  been  confined  to  these 
two  belts.  Much  timber  of  various  kinds  and  qualities  is  cut 
every  year  in  every  state  in  the  Union,  though  naturally  it  is 
less  in  the  prairie  states  than  in  those  which  were  originally 
forested.  In  the  older  states  some  of  the  timberland  has  been 
cut  over  several  times  since  the  first  settlement  and  will  doubt- 
less yield  many  harvests  in  the  future.  But  the  greater  part  of 
our  original  virgin  forest  has  been  destroyed.  Such  cut-over 
lands  as  are  not  suitable  for  other  purposes  or  not  needed  im- 


276  PRINCIPLES  OF  NATIONAL  ECONOMY 

mediately  for  agriculture  will  undoubtedly  be  allowed  to  refor- 
est themselves  or  be  reforested  by  scientific  methods,  but  it  is 
safe  to  say  that  the  days  of  cheap  and  abundant  timber  in  this 
country  are  past.  From  this  time  forward  careful  conservation 
will  be  necessary  in  order  to  safeguard  an  adequate  supply. 

Mining.  The  greatest  of  all  our  extractive  industries  is  min- 
ing. Within  the  boundaries  of  the  United  States  are  found  a 
wealth  and  variety  of  minerals  such  as  no  other  country  is 
known  to  possess,  though  no  one  knows  what  new  discoveries 
may  yet  be  made  in  this  and  other  lands. 

Notable  among  our  mineral  products  are  the  following.  The 
values  given  are  for  the  year  1915. 

„     .  f  Bituminous $502,037,688 

\Anthracite 184,653,498 

rOre 101,288,984 

Iron^j 

I  Pig 401,409,604 

Copper 242,902,000 

Petroleum 179,462,890 

Natural  gas 101,312,381 

Gold 101,035,700 

Silver,  lead,  zinc,  aluminum,  cement,  building-stone,  lime, 
and  salt  are  also  valuable  products,  besides  many  others  of  less 
value.  Our  total  mineral  production  for  the  year  1915  aggre- 
gated more  than  two  and  a  third  billions  of  dollars. 

Since  minerals  are  not  reproduced  or  replaced  when  once 
extracted  from  the  earth,  it  is  only  a  question  of  time  before  all 
of  our  rich  deposits  will  be  exhausted.  In  some  cases  the 
deposits  are  so  enormous  as  to  remove  the  time  of  their  exhaus- 
tion so  far  into  the  future  that  it  is  difficult  for  us  to  realize  that 
it  is  coming.  Authorities  agree  that  our  coal  deposits  will  last 
for  many  hundreds  of  years,  some  say  many  thousands  of  years. 
A  thousand  years  seems  a  long  time  to  an  individual,  but  it  is 
not  so  very  long  in  the  life  of  a  nation.  If,  however,  we  have 
enough  coal  to  last,  let  us  say,  for  only  a  thousand  years,  it  is 
a  difficult  question  to  decide  to  what  extent  that  should  give  us 
concern  for  the  future  welfare  of  our  country.  It  is  easy  to 


THE  EXTRACTIVE  INDUSTRIES  277 

laugh  and  to  say  that  it  need  not  concern  us,  for  we  shall  not  be 
here  to  suffer  inconvenience.  It  is  also  easy  to  become  too  much 
alarmed,  for  with  the  progress  of  invention  we  may  find  other 
sources  of  heat  and  power  before  our  coal  is  gone.  Probably 
our  best  policy  is  merely  to  avoid  unreasonable  waste  or  de- 
struction of  mineral  resources  and  then  leave  future  generations 
to  work  out  their  own  problems.  Wisdom  will  not  die  with  us 
of  the  present  generation. 

Instability  of  the  extractive  industries.  All  our  extractive  in- 
dustries have  not  only  added  greatly  to  our  material  wealth ; 
they  have  likewise  given  rise  to  picturesque  but  somewhat 
unstable  phases  of  our  social  life.  The  early  hunters  and  trap- 
pers were  a  hardy,  adventurous  race,  whose  deeds  and  prowess 
have  become  a  part  of  our  national  history.  Our  herdsmen 
likewise,  especially  those  who  developed  the  cattle  business  on 
the  Great  Plains,  supplied  an  element  of  romance  and  adven- 
ture which  still  appeals  to  the  imagination  of  our  people.  Our 
hardy  fishermen  and  whalers  have  given  splendid  examples  of 
the  courage  and  strenuousness  which  can  wrest  a  living  from  the 
unconquerable  ocean.  Our  lumber-camps  and  our  mining-camps 
have  attracted  adventurous  and  unstable  characters  from  the 
ends  of  the  earth  and  furnished  much  excellent  material  for  the 
story-writers.  But  instability  is  a  characteristic  of  these  indus- 
tries and,  consequently,  of  the  life  which  grew  up  around  them. 
Stability  can  be  supplied  to  our  national  life  only  by  industries 
which  are  themselves  self-perpetuating.  The  genetic  industries 
must  supply  that  need. 


CHAPTER  XIX 
THE  GENETIC  INDUSTRIES 

What  are  the  genetic  industries  ?  By  the  genetic  industries 
are  meant  those  in  which  men  make  conscious  and  systematic 
efforts  to  direct  the  biological  processes  of  reproduction  so  as  to 
increase  the  supply  of  desirable  plants  and  animals.  The  great- 
est of  these  is  agriculture,  which  includes  both  the  cultivation 
of  plants  and  the  breeding  of  animals.  Forestry  and  fish  cul- 
ture are  also  included  under  the  head  of  genetic  industries. 
Agriculture,  however,  is  sometimes  carried  on  in  such  a  slip- 
shod manner  as  scarcely  to  deserve  to  be  classed  as  a  genetic 
industry.  When  farmers  make  no  effort  to  preserve  the  fertility 
of  their  soil,  but  exhaust  it  by  wasteful  methods  of  tillage  and 
by  reckless  overcropping  and  then  move  on  to  new  and  unex- 
hausted areas,  their  business  is  sometimes  called  mining  the  soil. 
A  genuinely  genetic  type  of  agriculture  can  endure  and  even 
improve  for  indefinite  periods  of  time  on  the  same  soil ;  that 
is,  it  not  only  preserves  but  improves  the  fertility  of  the  soil, 
generation  after  generation,  for  hundreds  and  thousands  of 
years.  It  thus  makes  possible  a  stable,  an  enduring,  and  an 
expanding  civilization  such  as  could  not  be  supported  ex- 
clusively by  any  of  the  extractive  industries. 

Demand  of  all  outdoor  industries  for  space.  All  those  indus- 
tries which  appropriate  or  increase  the  products  of  the  soil, 
such  as  hunting,  grazing,  lumbering,  forestry,  and  farming, 
have  one  characteristic  in  common.  They  all  require  a  great 
deal  of  space  as  compared  with  mining  and  the  secondary  indus- 
tries, such  as  manufacturing  and  merchandising.  So  great  is 
this  demand  for  space  on  the  part  of  those  industries  which 
gather  in  or  develop  the  products  of  the  soil  that  those  who 
engage  in  them  must  of  necessity  spread  themselves  over  wide 
areas  in  proportion  to  their  population.  They  are  compelled  by 

278 


THE  GENETIC  INDUSTRIES  279 

the  nature  of  their  industries  to  live  in  scattered  homes  or 
in  small  villages  located  far  apart.  They  are  therefore  called 
"rural"  (that  is,  "field"  or  "open-space"  industries),  and 
those  who  engage  in  them  are  called  "rural,"  "field,"  and 
"open-space"  people.  Living  so  far  apart,  with  plenty  of  room, 
in  close  contact  with  nature  but  in  slight  contact  with  other  men 
because  of  the  distances  between  them,  produces  a  profound 
reaction  upon  their  lives  and  characters.  Perhaps  it  would  be 
more  accurate  to  say  that  those  who  engage  in  the  indoor  indus- 
tries are  so  cramped  for  space  and  have  so  few  contacts  with 
nature  and  so  many  contacts  with  one  another  that  a  profound 
and  artificial  change  is  produced  in  their  lives.  By  the  indoor 
industries  are  meant  all  those  which,  in  contrast  to  the  field  in- 
dustries, require  so  little  space  that  they  can  be  walled  in  and 
roofed  over.  It  is  sometimes  difficult  for  indoor  and  outdoor 
people  to  understand  one  another. 

We  have  seen  in  the  last  chapter  that  the  utilization  of  the 
soil,  not  only  on  our  own  frontier  but  also  in  the  development  of 
civilized  life  among  our  remote  ancestors,  passed  through 
several  distinct  stages,  such  as  the  hunting  stage,  the  grazing 
stage,  and  the  agricultural  stage.  These  are  progressive  stages 
in  the  economizing  of  space.  It  takes  a  great  deal  more  terri- 
tory to  support  a  given  population  by  hunting  than  by  grazing, 
and  by  grazing  than  by  agriculture.  When  game  grew  scarce 
or  when  population  increased,  those  who  had  the  wisdom  to 
make  the  change  were  forced  into  grazing,  and  again  into  till- 
age, in  order  to  increase  their  means  of  subsistence.  What  an 
uneconomical  use  of  land  hunting  was  may  be  inferred  from  the 
fact  that,  according  to  the  best  authorities,  there  never  were 
more  than  one  million  Indians  within  the  boundaries  of  the 
present  United  States.  This  territory  now  supports  approxi- 
mately a  hundred  times  that  number  of  people  and  supports 
them  more  comfortably  than  the  Indians  were  supported.  Each 
Indian  tribe  was  forced  to  guard  its  hunting-grounds  lest  they 
be  invaded  by  hunters  from  other  tribes  and  the  source  of  its 
subsistence  be  cut  off. 


280  PRINCIPLES  OF  NATIONAL  ECONOMY 

Tillage.  Tillage  consists  essentially  of  three  processes  :  first, 
preparing  a  good  seed  bed,  in  which  plants  can  grow  more 
vigorously  than  in  natural,  or  unprepared,  soil ;  second,  plant- 
ing in  this  prepared  seed  bed  the  seeds  of  such  plants  as  are 
deemed  most  useful  or  desirable;  and,  third,  destroying  all 
other  plants,  commonly  called  weeds,  which  may  start  to  grow 
in  competition  with  the  plants  whose  seeds  have  been  planted. 

Scientific  agriculture.  While  tillage  consists  essentially  of 
these  three  processes,  scientific  agriculture  includes  many 
things  besides.  We  need  to  be  on  our  guard,  however,  against 
a  pedantic  use  of  the  word  "scientific"  as  applied  to  agricul- 
ture. Scientific  agriculture  is  nothing  more  nor  less  than  the 
most  economical  and  effective  use  of  all  the  factors  of  agricul- 
tural production.  Specifically  it  consists  mainly,  though  not 
exclusively,  in  economizing,  first,  the  plant  food  in  the  soil; 
second,  space;  third,  labor;  and,  fourth,  capital  (or  equip- 
ment). Economizing  plant  food  means  getting  as  large  a 
product  as  possible  without  depleting  the  supply  of  plant  food. 
Economizing  space  means  getting  as  large  a  product  as  pos- 
sible from  a  given  area ;  that  is,  as  large  a  product  per  acre  as 
possible.  Economizing  labor  means  getting  as  large  a  product 
per  unit  of  labor,  or  per  man,  as  possible.  Economizing  capital 
(or  equipment)  means  getting  as  large  a  product  per  unit  of 
capital  (or  equipment)  as  possible. 

Excessive  economy  of  any  one  of  these  factors  always  in- 
volves a  certain  amount  of  waste  with  respect  to  some  of  the 
others.  For  example,  it  is  quite  possible  to  economize  space  to 
such  an  extent  as  to  exhaust  plant  food,  and  vice  versa.  That 
is  to  say,  a  farmer  may  try  for  a  period  of  years  to  get  so 
much  from  each  acre  as  eventually  to  deplete  the  fertility  of 
his  soil.  By  a  judicious  rotation  of  crops  and  the  keeping  of 
live  stock  he  may  preserve  the  fertility  of  his  soil  for  indefinite 
periods,  but  this  may  not  give  him  the  maximum  product  per 
acre  in  the  present  period.  If  there  is  one  crop  that  yields 
better  than  any  other  a  shortsighted  farmer  is  tempted  to  grow 
that  single  crop,  since  it  would  give  him  a  larger  product  per 


THE  GENETIC  INDUSTRIES  281 

acre,  but  such  continuous  cropping  tends  to  exhaust  his  soil. 
Rotating  tends  to  preserve  the  fertility  of  the  soil,  but  gives 
less  per  acre  in  the  present;  this  frequently  means  growing 
some  crops  which  are  not  so  profitable  in  the  immediate 
present  as  is  the  main  crop. 

The  lav/  of  diminishing  returns.  A  similar  conflict  arises  be- 
tween the  economy  of  space  and  the  economy  of  labor.  It  is 
possible  to  try  to  grow  so  much  per  acre  as  to  reduce  the  prod- 
uct per  man,  or  per  unit  of  labor.  It  is  this  phase  of  the 
question  of  economy  that  is  commonly  known  as  the  law  of 
diminishing  returns  from  land.  This  law  is  simply  that  after 
a  certain  amount  of  labor  with  the  appropriate  tools  has  been 
applied  to  the  cultivation  of  a  given  crop  on  a  given  piece  of 
land  further  applications  of  labor  do  not  yield  proportional  re- 
turns. They  may  increase  the  crop  slightly,  thus  increasing 
the  yield  per  acre,  but  they  will  not  increase  the  crop  in  pro- 
portion as  the  labor  is  increased.  The  result  is  a  decrease  in 
proportion  to  the  number  of  units  of  labor.1 

This  principle  may  be  illustrated  by  means  of  the  following 
table,  which  purports  to  show  how  much  corn,  in  a  hypothetical 
case,  could  be  produced  upon  a  ten-acre  field  by  using  different 
quantities  of  labor  and  tools,  the  quantities  being  expressed  in 
terms  of  days'  labor  of  a  man  and  team  with  appropriate  tools. 
The  ratio  between  the  product  and  the  labor  is  shown  in  the 
third  column,  which  states  the  number  of  bushels  produced  per 
day's  labor. 

On  a  field  such  as  we  have  assumed,  it  would  be  possible,  by 
using  fifty  days'  labor,  to  get  sixty-five  bushels  per  acre,  which 
would  be  more  economical  of  space  than  to  put  twenty-five  days 
on  it  and  get  only  forty-five  bushels  per  acre.  It  would  be  less 
economical  of  labor,  however,  since  by  using  only  twenty-five 
days'  labor  the  farmer  gets  eighteen  bushels  for  each  day, 
whereas  he  gets  only  thirteen  bushels  for  each  day  when  he 
applies  fifty  days'  labor  to  its  cultivation.  Just  how  to  balance 

1See  the  author's  chapter  on  Diminishing  Returns,  in  his  volume,  "The  Dis- 
tribution of  Wealth."  The  Macmillan  Company,  New  York,  1914. 


282 


PRINCIPLES  OF  NATIONAL  ECONOMY 


the  two  factors,  land  and  labor,  so  as  to  get  the  best  results 
from  both  is  a  very  nice  problem  in  farm  management.  If  labor 
is  cheap  and  land  is  dear  it  is  more  important  to  economize 
space  than  labor,  but  if  labor  is  dear  and  land  is  cheap  the 
opposite  is  better. 


DAY'S  LABOR  OF  A  MAN 
AND  TEAM  WITH 
APPROPRIATE  TOOLS 

TOTAL  YIELD  IN 
BUSHELS 

BUSHELS  PER  DAY'S 
LABOR 

BUSHELS  PER 
ACRE 

I 

O 

o"" 

O 

5 

10 

5° 
150 

IO 
15 

Increasing 
returns 

5 
'5 

'5 

270 

18 

27 

20 

380 

'9, 

38 

25 

45° 

18^ 

45 

3° 

510 

i? 

5i 

35 

560 

16 

Diminishing 

56 

40 

600 

15 

returns 

60 

45 

630 

14 

63 

5° 

650 

J3, 

65 

The  great  law  of  productivity.  This  law  of  diminishing  re- 
turns has  been  called  the  great  law  of  agricultural  production. 
It  is  a  part  of  a  wider  law,  which  may  be  called  the  law  of 
variable  proportions,  which  is  the  fundamental  law  of  all  pro- 
duction. This  larger  law  will  be  discussed  in  a  later  chapter 
devoted  to  that  subject.1  For  the  present  it  is  sufficient  to  point 
out  that  it  presents  the  problem  of  balancing  the  different  fac- 
tors which  have  to  be  combined  in  production.  It  is  much  the 
same  problem  at  bottom,  whether  it  be  the  balancing  of  the 
different  elements  of  plant  food  in  fertilizers  or  of  the  different 
elements  of  animal  food  in  the  feeding  of  cattle,  the  balancing 
of  such  factors  as  labor,  land,  and  capital  in  running  a  farm  or 
a  factory  or  the  balancing  of  the  different  kinds  of  people  that 
make  up  a  nation. 

The  largest  industry.  Agriculture  is  not  merely  one  of  the 
basic,  or  primary,  industries ;  it  is  the  most  important  of  all  in- 
dustries if  we  consider  the  world  at  large  or  any  large  section  of 

1  See  Chapter  XXXIII. 


THE  GENETIC  INDUSTRIES  283 

it  which  is  compelled  to  live  within  itself.  Considerable  sec- 
tions of  country  and  considerable  masses  of  population  may  live 
primarily  by  the  indoor  industries,  sending  out  their  surplus 
produce  to  distant  lands  and  bringing  back  in  exchange  the 
products  of  the  soil.  Thus  a  country  like  England  or  consider- 
able portions  of  our  own  country,  such  as  southern  New  Eng- 
land, may  become  largely  urbanized ;  that  is  to  say,  the  greater 
portion  of  the  people  may  engage  in  indoor  rather  than  in  out- 
door industries.  But  they  live  by  selling  the  products  of  their 
indoor  industries  to  people  far  beyond  their  own  boundaries  and 
bringing  in  from  the  ends  of  the  earth  the  products  of  the  soil. 
The  United  States  as  a  whole  is  tending  to  become  an  urban- 
ized nation  ;  that  is,  it  is  tending  toward  a  condition  where  more 
than  half  of  its  people  will  work  indoors  rather  than  outdoors. 
Again,  there  is  a  tendency  in  the  world  at  large  for  the  indoor 
industries  to  gain  somewhat  in  importance  as  compared  with 
the  outdoor  industries,  though  it  is  unlikely  that  the  former  will 
ever  actually  overtake  the  latter. 

Why  agriculture  is  losing  ground.  As  civilization  advances, 
people  tend  to  demand  finer  and  finer  products  for  consump- 
tion. Usually,  though  not  in  every  case,  producing  a  finer  prod- 
uct means  doing  more  work  in  the  finer,  or  finishing,  stages. 
It  takes  no  more  wool  or  cotton,  and  therefore  no  more  agri- 
cultural labor,  to  make  fine  than  coarse  clothing.  The  differ- 
ence is  mainly  in  the  amount  of  work  which  is  put  upon  the 
material  after  it  leaves  the  farm.  In  other  words,  of  the  total 
work  put  upon  material  for  fine  clothes  a  smaller  proportion  is 
outdoor  labor  than  for  coarse  clothes,  and  a  larger  proportion 
is  indoor  labor.  The  same  principle  applies  to  shoes,  furniture, 
vehicles,  and  many  articles  of  food.  Throughout  the  whole 
civilized  world  this  increase  in  the  proportion  of  labor  per- 
formed indoors  as  compared  with  that  performed  outdoors 
tends  to  increase  the  city  population  more  rapidly  than  the 
rural  population. 

Another  and  more  important  fact  is  the  increased  use  of 
agricultural  machinery.  Fewer  men  are  now  needed  in  the 


284  PRINCIPLES  OF  NATIONAL  ECONOMY 

actual  cultivation  of  the  land,  as  some  of  the  work  is  done  in 
the  factories  where  farm  machinery  is  made.  Whereas  all  the 
men  who  formerly  helped  in  the  harvesting  of  a  wheat  crop 
worked  in  the  fields,  now  some  of  them  work  in  the  shops  and 
factories  making  harvesting  machinery,  and  only  a  part  of  the 
total  number  actually  work  in  the  fields.  The  same  change  has 
taken  place  with  respect  to  many  other  kinds  of  farm  work. 

Influence  of  occupation  on  character.  Of  all  the  leading  oc- 
cupations in  civilized  countries,  there  is  only  one  in  which  suc- 
cess depends  primarily  upon  the  ability  to  deal  efficiently  with 
nature  and  natural  forces;  that  is,  farming.  In  most  of  the 
others  success  depends  quite  as  much  on  ability  to  deal  with 
other  men  as  on  ability  to  deal  with  nature.  Those  whose 
success  depends  primarily  upon  ability  to  deal  with  other 
men — whether  it  be  to  please,  persuade,  or  amuse  them 
or  to  wheedle  the  money  out  of  their  pocketbooks — must  neces- 
sarily become  expert  in  those  arts  of  expression  and  deportment 
which  are  pleasing  to  other  men.  Those,  on  the  other  hand, 
whose  success  depends  primarily  upon  their  ability  to  deal  with 
nature  must  become  equally  expert  in  the  art  of  dealing  with 
nature ;  that  is,  in  handling  materials  and  directing  natural 
forces.  It  is  not  surprising,  therefore,  that  these  two  classes  of 
experts,  having  so  little  in  common,  should  sometimes  fail  to 
understand  and  appreciate  one  another.  A  farmer,  particularly 
the  old-fashioned,  self-sufficing  farmer,  who  had  few  points  of 
contact  with  other  men  but  many  points  of  contact  with  nature, 
would  naturally  acquire  less  of  what  are  sometimes  called  the 
social  graces,  less  adroitness  in  the  amenities  of  polite  society, 
less  expertness  in  indoor  etiquette,  than  one  whose  business  or 
professional  success  depended  upon  these  forms  of  skill.  They 
who  get  their  living  out  of  the  soil  must  know  the  soil,  the 
weather,  the  times  and  seasons,  and  everything  that  will  affect 
their  success,  whereas  they  who  get  their  living  by  dealing  with 
other  men  must  know  the  ways  of  men. 

Commercial  agriculture.  The  characteristics  which  farmers 
of  an  earlier  day  developed  naturally  and  almost  of  neces- 


THE  GENETIC  INDUSTRIES  285 

sity  are  becoming  less  prominent  as  the  nature  of  agriculture 
changes.  Self-sufficing  agriculture  has  become  a  thing  of  the 
past,  and  we  are  developing  what  may  be  called  commercial 
agriculture;  that  is,  a  system  in  which  the  farmer  is  a  buyer 
and  seller,  a  dealer  with  other  men,  to  almost  the  same  extent 
as  a  city  business  man.  He  must  now  understand  not  only 
markets  but  political  and  social  conditions,  even  those  deli- 
cate psychological  factors  upon  which  successful  buying  and 
selling  depend.  This  is  tending  to  wipe  out  whatever  dis- 
tinctions formerly  existed  between  the  dwellers  in  the  city  and 
the  dwellers  in  the  country. 

The  independence  and  dependence  of  the  farmer.  We  are  hear- 
ing constantly  reiterated,  especially  by  advocates  of  the  back- 
to-the-land  movement,  that  the  farmer  is  the  most  independent 
person  in  the  world.  The  farmer  himself  does  not  always  see 
it  that  way.  Probably  no  one  is  so  dependent  upon  outward 
physical  conditions  as  the  farmer.  He  must  continually  watch 
the  weather  and  guard  against  pests  of  all  sorts,  animal  diseases, 
predatory  animals,  and  even  town  marauders.  Every  year 
lightning,  hail,  wind,  and  floods  destroy  crops  in  some  part  of 
the  country.  When  the  farmer  thinks  of  all  his  troubles  he  is 
very  likely  to  long  for  the  comparative  safety  and  independence 
of  the  indoor  worker.  On  the  other  hand,  the  indoor  worker  is 
constantly  harassed  by  troubles  of  human  origin — political 
elections,  commercial  crises,  changes  of  fashion,  the  organiza- 
tion of  predatory  trusts  and  monopolies,  labor  troubles,  and  the 
type  of  advertiser  who  levies  something  akin  to  blackmail. 
When  he  thinks  of  all  his  troubles  he  is  very  likely  to  long  for 
the  comparative  safety  and  independence  of  the  farmer. 

One  important  characteristic  of  agricultural  industry  is  its 
dependence  upon  the  seasons.  The  indoor  worker  is  frequently 
able  to  continue  uninterruptedly  in  one  kind  of  work,  week 
after  week,  month  after  month,  and  year  after  year.  From  the 
very  nature  of  the  case  this  is  impossible  in  agriculture,  for 
every  crop  has  its  growing-season  and  its  time  of  harvest.  On 
every  farm,  almost  every  hour  of  the  day  has  its  own  special 


286  PRINCIPLES  OF  NATIONAL  ECONOMY 

work  to  be  done,  so  that  the  work  is  continually  changing,  not 
simply  from  season  to  season,  from  month  to  month,  and  from 
week  to  week  but  even  from  hour  to  hour.  This  makes  agricul- 
ture almost  of  necessity  an  industry  of  small  units.  In  an 
indoor  industry,  where  a  man  can  be  kept  at  the  same  job 
continuously,  mechanical  or  automatic  administrative  methods 
and  devices  may  be  installed  so  as  to  simplify  the  work  of 
superintendence.  It  is  possible,  therefore,  for  a  man  of  very 
moderate  intellect  and  power  to  run  an  establishment  employ- 
ing thousands  of  men.  To  run  ten  men  efficiently  on  a  farm, 
where  each  man  must  be  assigned  a  new  job  frequently  on  a 
moment's  notice,  where  the  whole  work  of  the  farm  must  be 
reorganized  to  meet  a  situation  brought  about  by  the  change  in 
the  weather  or  in  the  conditions  of  some  growing  crop,  requires 
as  great  mental  ability  as  to  run  an  indoor  establishment  em- 
ploying hundreds  of  men.  To  run  a  farm  employing  one  hun- 
dred men  and  run  it  efficiently  would  require  the  ability  of  a 
great  military  commander,  a  merchant  prince,  a  captain  of  in- 
dustry, or  a  university  president.  Very  few  farming  establish- 
ments which  employ  as  many  as  one  hundred  men  have  ever 
succeeded  or  can  succeed. 

Country  people  generally  self-employed.  Perhaps  the  most 
important  fact  concerning  agriculture  is  that  a  very  large  pro- 
portion of  those  engaged  in  it  are  self-employed,  whereas  the 
vast  majority  of  those  who  live  in  cities  are  employed  by  other 
people.  The  fact  that  farming  is  an  industry  of  small  units, 
while  indoor  industries  are  generally  industries  of  large  units, 
produces  this  difference. 

Some  of  the  deepest  students  of  political  and  social  tend- 
encies have  come  to  doubt  whether  democracy  can  ever  develop 
to  a  high  stage  of  efficiency  except  among  people  who  are  in  the 
main  self-employed.  It  is  true  that  modern  democracy  arose 
first  in  the  cities  and  towns,  but  it  is  likewise  true  that  at  that 
time  the  cities  and  towns  were  the  homes  of  self-employed  men. 
Before  the  rise  of  the  factory  system  such  manufacturing  as 
was  done  was  carried  on  in  small  shops  by  craftsmen  who  were 


THE  GENETIC  INDUSTRIES  287 

in  the  majority  of  cases  self-employed.  The  rural  districts, 
however,  were  under  the  feudal  system.  Conditions  are  ex- 
actly reversed  at  the  present  time.  Under  the  factory  system 
the  great  majority  of  people  in  the  indoor  industries  work  under 
bosses.  Since  the  break-up  of  the  feudal  system  and  the  rise  of 
the  one-family  farm,  which  is  the  characteristic  farm  in  the 
United  States,  the  average  dweller  in  the  country  is  his  own 
boss.  This  may  have  something  to  do  with  the  fact  that  city 
politics  are  run  by  bosses  and  country  politics  are  not. 

According  to  the  census  of  1850  there  was  one  farm  in  this 
country  for  every  fourteen  persons  living  under  rural  condi- 
tions; that  is,  outside  of  cities  of  eight  thousand  inhabitants 
or  more.  According  to  the  census  of  1900  there  was  one  farm 
for  every  nine  persons  in  rural  residence.  This  shows  that  up 
to  1900,  at  any  rate,  the  tendency  was  toward  a  larger  number 
of  independently  operated  farms  in  proportion  to  the  rural 
population.  Again,  in  1900  there  was  one  farm  of  fifty  acres  or 
more  for  every  13.4  rural  dwellers.  When  we  consider  that 
towns  and  villages  of  eight  thousand  or  less  contain  a  fair  pro- 
portion of  those  13.4  people,  we  shall  see  that  in  the  open  coun- 
try itself  there  are  very  few  people  engaged  in  work  on  each 
farm.  They  are  nearly  all  what  are  called  one-family  farms ; 
that  is,  farms  operated  mainly  by  the  labor  power  of  one  family. 

Interdependence  of  the  sexes.  The  division  of  labor  between 
the  sexes  is  much  more  marked,  of  course,  in  agriculture  than 
in  indoor  industries.  There  are  so  many  operations  on  every 
farm  which  require  the  superior  muscularity  of  the  male  as 
practically  to  shut  women  out.  At  the  same  time,  the  fact  that 
the  farms  are  so  far  apart  makes  it  impossible  for  these  mus- 
cular males  to  get  along  without  women  to  run  their  houses.  The 
men  cannot  live  in  boarding  houses,  because  that  would  make  it 
necessary  to  live  too  far  from  their  work.  Practically  every 
farmer  has  to  have  a  wife  to  do  the  indoor  work.  This  may  not 
be  the  highest  motive  for  marrying,  but  still  it  does  encourage 
the  marriage  habit.  Consequently  one  finds  in  our  rural  dis- 
tricts fewer  old,  unmarried  males  than  one  finds  infesting  our 


288  PRINCIPLES  OF  NATIONAL  ECONOMY 

cities  and  towns.  Moreover,  there  are  comparatively  few  oppor- 
tunities for  a  woman  to  make  an  independent  living  in  the  coun- 
try, so  that  she  is  almost  under  compulsion  to  marry  or  else  to 
move  to  town,  where  she  can  get  remunerative  employment. 

Forestry.  Forestry  as  distinct  from  lumbering  has  only  re- 
cently received  attention  in  this  country.  The  United  States 
Timber-Culture  Act  of  1873  was  designed  to  encourage  tree- 
planting  by  granting  not  more  than  one  hundred  and  sixty 
acres  of  the  public  land  free  of  cost  to  anyone  who  would  plant 
a  part  of  it  to  timber  trees.  At  first  it  was  required  that  one 
fourth  of  the  land  be  so  planted,  but  the  requirement  was  soon 
changed  to  one  sixteenth.  The  purpose  was  obviously  to  en- 
courage the  partial  forestation  of  the  Western  prairies,  but  what 
nature  herself  had  never  been  able  to  accomplish  was  not  ac- 
complished by  act  of  Congress.  As  one  rides  over  the  Western 
plains  one  occasionally  sees  small  tracts  of  straggling  trees 
fighting  for  an  existence  on  land  which  is  too  dry  for  them. 
These  are  the  results  of  that  act  of  Congress.  Possibly  if  the 
act  had  been  passed  earlier — while  there  was  public  land  left 
in  the  humid  belt — something  might  have  been  accomplished, 
but  even  this  is  doubtful.  Prairie  land  which  will  grow  trees  is 
generally  more  valuable  for  other  purposes.  Even  if  a  settler 
had,  on  such  land,  made  trees  grow  successfully  he  would  prob- 
ably have  found  it  advantageous  to  cut  them  down  in  order  to 
devote  the  land  to  some  more  valuable  purpose. 

Forestry  economical  on  waste  land.  Forestry,  in  order  to  be 
an  economic  success,  must  obviously  be  practiced  on  land  which 
would  produce  a  greater  value  at  lower  cost  when  planted  to 
trees  than  when  planted  to  anything  else.  Mountainous  and 
semimountainous  lands,  stony  or  swampy  lands,  and  those 
which  for  other  reasons  are  unsuited  to  tillage  or  pasturage 
furnish  the  natural  opportunity  for  the  practice  of  forestry  on 
a  large  scale.  While  the  annual  product  in  the  form  of  the 
annual  timber  growth  is  small,  the  cost  is  likewise  small.  Since 
the  land  would  otherwise  go  to  waste  altogether,  it  is  better 
to  get  even  a  small  product  than  none  at  all. 


THE  GENETIC  INDUSTRIES  289 

Scientific  forestry.  In  recent  years  the  Federal  government 
and  several  of  the  states  have  created  forest  reserves.  Scien- 
tific forestry  is  being  practiced,  but  it  must  be  remembered 
that  scientific  forestry  in  this  country  is  necessarily  different 
from  what  it  is  in  old  countries.  In  a  country  where  lumber 
is  still  cheap  as  compared  with  other  lands,  though  dear  as  com- 
pared with  what  it  once  was,  and  where  labor  is  dear,  as  it  is  in 
the  United  States,  one  cannot  do  in  the  name  of  science  what 
one  can  do  in  an  old  country,  where  lumber  is  dear  and  labor 
cheap.  A  serious  problem  for  the  American  forester  is  to  keep 
costs  down ;  unless  he  does  this  he  may  find  that  the  timber  is 
not  worth  what  it  costs  to  grow  it.  For  this  reason  it  is  not 
the  custom  in  this  country  to  do  much  planting  of  trees  or 
preparation  of  the  ground.  The  work  is  mainly  confined,  first, 
to  cutting  out  undesirable  growths  in  order  to  give  the  more 
durable  growths,  which  are  in  the  main  self-seeded,  a  chance  to 
grow ;  and,  second,  and  more  important  still,  to  guard  against 
forest  fires.  Our  summers,  which  are  dry  compared  with  those 
of  Europe,  make  the  forest  fire  the  great  enemy  of  the  American 
forester.  The  fight  against  diseases  and  pests  is  a  third  task. 

Fish  culture.  Fish  culture  has  been  fostered  by  the  Federal 
and  state  governments  of  the  United  States  and  by  various 
private  agencies.  Spawn  is  collected  and  hatched,  and  millions 
of  young  fish  are  distributed  in  our  streams  and  along  our 
seacoasts.  A  great  deal  of  study  is  being  given  to  the  habits  of 
various  edible  fishes  and  to  the  sources  of  their  food.  Private 
enterprise  also  is  active  in  stocking  streams  and  small  bodies  of 
water  and  in  growing  fish  of  various  kinds  for  the  market. 

With  our  Great  Lakes  on  the  north,  the  ocean  on  the  east  and 
the  west,  and  the  Gulf  of  Mexico  on  the  south,  and  with  all  our 
noble  rivers,  we  have  access  to  such  vast  and  seemingly  inexhaust- 
ible supplies  of  fish  that  fish  culture  in  a  strict  sense  has  not 
developed  very  far  among  us.  Hatching  and  distributing  spawn 
and  leaving  the  spawn  to  shift  for  itself  and  take  its  chances 
along  with  other  wild  fish  is  a  step  in  the  right  direction,  but  it 
stops  far  short  of  the  work  of  the  animal-breeders  on  our  farms. 


CHAPTER  XX 

THE  MANUFACTURING  INDUSTRIES 

Various  types  of  manufacturing  establishments.  When  we 
think  of  a  manufacturing  industry  nowadays,  we  are  very  likely 
to  form  a  mental  picture  of  a  huge  building  or  group  of  build- 
ings dominated  by  a  tall  chimney  and  filled  with  roaring  ma- 
chinery and  busy  men  and  women.  Such  is,  indeed,  the  typical 
factory,  though  much  manufacturing  is  still  done  in  small  shops 
where  a  few  men  work  with  small  and  comparatively  simple 
tools.  In  the  large  factory  the  tools  and  the  raw  material,  as 
well  as  the  buildings,  engines,  etc.,  are  usually  owned  by  one 
man  or  group  of  men,  while  the  work  is  done  by  another  group. 
In  smaller  establishments  various  combinations  are  found.  One 
kind  of  manufacturing  establishment  which  is  still  numerous 
and  widely  distributed  is  the  small  shop  where  the  worker  owns 
his  own  tools  and  equipment,  buys  his  own  raw  materials,  and 
sells  the  finished  product.  It  does  not  constitute  much  of  a 
change,  certainly  not  a  revolution,  when  he  hires  a  few  helpers 
or  apprentices  to  assist  him.  They  work  with  his  tools  upon  his 
raw  materials,  and  they  receive  their  compensation  in  the  form 
of  wages  instead  of  in  the  form  of  a  share  of  the  profits  of  the 
business.  Even  where  the  owner  ceases  to  do  any  of  the  work 
except  to  keep  the  accounts,  buy  the  raw  materials  and  sell  the 
products,  and  exercise  general  supervision  and  management, 
the  transition  may  have  been  so  gradual  as  to  attract  no  one's 
attention.  By  this  gradual  change,  however,  a  type  of  manu- 
factory may  be  developed  which  is  very  different  from  that  with 
which  it  started. 

But  the  transition  is  not  always  made  in  this  way.  Other 
methods  of  organization  have  existed  at  various  times  and  still 

exist.    In  one  class  of  shops  the  worker  owns  his  own  tools  and 

290 


THE  MANUFACTURING  INDUSTRIES  291 

runs  his  own  shop,  but  does  not  own  the  raw  materials  upon 
which  he  works.  These  are  furnished  by  an  outside  person  who 
supplies  them  and  owns  the  finished  product,  paying  the  worker 
a  price  agreed  upon  for  the  work  which  he  does.  In  this  case 
also  the  worker  may  hire  a  few  helpers  or  apprentices. 

Still  another  method  is  found  where  the  worker  owns  neither 
the  materials  upon  which,  nor  the  tools  with  which,  he  works.  A 
third  person  supplies  both  materials  and  tools, — everything,  in 
fact,  except  the  place  in  which  the  work  is  done,  which  place 
the  laborer  himself  supplies. 

In  the  modern  factory,  however,  everything  is  assembled  in 
one  building  or  group  of  buildings,  around  one  power  plant; 
everything  is  owned  by  one  group  of  individuals,  and  the  laborer 
furnishes  nothing  except  his  own  skill  and  strength.  The  great 
advantage  of  this  system  is  its  economical  use  of  power.  Wher- 
ever a  large  use  of  power  is  necessary  it  is  important  that  it  be 
effectively  and  economically  utilized.  In  all  such  cases  the 
modern  factory  tends  to  displace  all  other  methods  of  manufac- 
turing. Where  comparatively  little  power  is  required,  and 
where,  therefore,  it  is  not  of  such  great  importance  that  it  be 
economized,  other  methods  still  survive.  In  some  cases,  how- 
ever, the  competition  of  the  factory  is  so  severe  as  to  force  the 
workers  in  the  small  shops  to  work  for  very  low  wages.  Where 
the  main  factor  in  success  is  the  skill  of  the  worker  rather  than 
cheap  power,  the  small  shop  will  probably  continue  to  compete 
successfully  with  the  factory.  There  has  been  a  general  tend- 
ency, however,  for  the  large  factory  to  grow,  and  the  small  shop 
to  decline,  in  importance. 

Progress  toward  large-scale  production.  The  stages  of  this 
development  from  the  small  shop  to  the  factory  are  by  no 
means  clear.  Almost  every  form  of  manufacturing  will  be  found 
in  every  stage  of  economic  development.  The  large  factory  has 
come  to  be  the  dominant  form  only  since  the  invention  of  power- 
driven  machinery.  The  Industrial  Revolution,  as  it  is  called, 
was  the  rather  sudden  growth  of  the  factory  to  this  dominant 
position  during  the  latter  half  of  the  eighteenth  century. 


292  PRINCIPLES  OF  NATIONAL  ECONOMY 

Power-driven  machinery  and  large-scale  production.  A  re- 
markable series  of  inventions  followed  one  another  in  rapid 
succession  and  transformed  several  of  the  large  industries  of 
England  into  factory  industries.  These  changes  put  England 
definitely  in  the  lead  as  a  manufacturing  nation.  The  same 
revolution  came  in  other  countries  a  little  later.  Says  Marshall x : 

The  quarter  of  a  century  beginning  with  1760  saw  improvements 
follow  one  another  in  manufacture  even  more  rapidly  than  in  agricul- 
ture. During  that  period  the  transport  of  heavy  goods  was  cheapened 
by  Brindley's  canals,  the  production  of  power  by  Watt's  steam 
engine,  and  that  of  iron  by  Cort's  processes  of  puddling  and  rolling 
and  by  Roebuck's  method  of  smelting  it  by  coal  in  lieu  of  the  char- 
coal that  had  become  scarce ;  Hargreaves,  Crompton,  Arkwright, 
Cartwright,  and  others  invented,  or  at  least  made  economically 
serviceable,  the  spinning  jenny,  the  mule,  the  carding  machine,  and 
the  power  loom ;  Wedgwood  gave  a  great  impetus  to  the  pottery 
trade,  that  was  already  growing  rapidly ;  and  there  were  important 
inventions  in  printing  from  cylinders,  in  bleaching  by  chemical 
agents,  and  in  other  processes.  A  cotton  factory  was  for  the  first 
time  driven  directly  by  steam  power  in  1785,  the  last  year  of  the 
period.  The  beginning  of  the  nineteenth  century  saw  steamships  and 
steam  printing  presses,  and  the  use  of  gas  for  lighting  towns.  Rail- 
way locomotives,  telegraphy,  and  photography  came  a  little  later. 
Our  own  age  has  seen  numberless  improvements  and  new  economies 
in  production,  prominent  among  which  are  those  relating  to  the 
production  of  steel,  the  telephone,  the  electric  light,  and  the  gas 
engine ;  and  the  social  changes  arising  from  material  progress  are 
in  some  respects  more  rapid  than  ever.  But  the  groundwork  of  the 
changes  was  chiefly  laid  in  the  inventions  of  the  years  1760  to  1785. 

The  inventions  which  preceded  the  cotton  factory.  A  more 
detailed  account  of  a  most  remarkable  series  of  inventions 
which  revolutionized  the  cotton  industry  is  given  in  Walpole's 
" History  of  England  from  1815. "2  This  vivid  description  may 
be  taken  as  typical  of  what  took  place  in  other  industries. 

1  Alfred  Marshall,  Principles  of  Economics  (fourth  edition),  p. 42.  London, 1898. 
2 Quoted  from  Bullock,  Selected  Readings  in  Economics,  pp.  128-143.    Ginn 
and  Company,  Boston,  1907. 


THE  MANUFACTURING  INDUSTRIES  293 

In  the  middle  of  the  eighteenth  century,  then,  a  piece  of  cotton 
cloth,  in  the  true  sense  of  the  term,  had  never  been  in  England. 
The  so-called  cotton  goods  were  all  made  in  the  cottages  of  the  weav- 
ers. The  yarn  was  carded  by  hand ;  it  was  spun  by  hand ;  it  was 
worked  into  cloth  by  a  hand  loom.  The  weaver  was  usually  the  head 
of  the  family ;  his  wife  and  unmarried  daughters  spun  the  yarn  for 
him.  Spinning  was  the  ordinary  occupation  of  every  girl,  and  the 
distaff  was,  for  countless  centuries,  the  ordinary  occupation  of  every 
woman.  The  occupation  was  so  universal  that  the  distaff  was  oc- 
casionally used  as  a  synonym  for  "woman."  "Le  royaume  de  France 
ne  tombe  point  en  quenouille".  .  .  To  this  day  every  unmarried  girl 
is  commonly  described  as  a  spinster. 

The  operation  of  weaving  was,  however,  much  more  rapid  than 
that  of  spinning.  The  weaver  consumed  more  weft  than  his  own 
family  could  supply  him  with ;  and  the  weavers  generally  experi- 
enced the  greatest  difficulty  in  obtaining  sufficient  yarn. 

THE  FLY  SHUTTLE 

About  the  middle  of  the  eighteenth  century  the  ingenuity  of  two 
persons,  a  father  and  a  son,  made  this  difference  more  apparent.  The 
shuttle  had  originally  been  thrown  by  the  hand  from  one  end  of  the 
loom  to  the  other.  John  Kay,  a  native  of  Bury,  by  his  invention  of 
the  fly  shuttle,  saved  the  weaver  from  this  labor.  .  .  .  By  means  of 
these  inventions  the  productive  power  of  each  weaver  was  doubled. 
Each  weaver  was  easily  able  to  perform  the  amount  of  work  which 
had  previously  required  two  men  to  do,  and  the  spinsters  found 
themselves  more  hopelessly  distanced  than  ever  in  their  efforts  to 
supply  the  weavers  with  weft.  .  .  . 

HARGREAVES'S  SPINNING  JENNY 

The  trade  was  in  this  humble  and  primitive  state  when  a  series 
of  extraordinary  and  unparalleled  inventions  revolutionized  the  con- 
ditions under  which  cotton  had  been  hitherto  prepared.  A  little  more 
than  a  century  ago  (1764-1767)  James  Hargreaves,  a  poor  weaver  in 
the  neighborhood  of  Blackburn,  was  returning  home  from  a  long 
walk,  in  which  he  had  been  purchasing  a  further  supply  of  yarn  for 
his  loom.  As  he  entered  his  cottage  his  wife,  Jenny,  accidentally 


294  PRINCIPLES  OF  NATIONAL  ECONOMY 

upset  the  spindle  which  she  was  using.  Hargreaves  noticed  that  the 
spindles,  which  were  now  thrown  into  an  upright  position,  continued 
to  revolve,  and  that  the  thread  was  still  spinning  in  his  wife's  hand. 
The  idea  immediately  occurred  to  him  that  it  would  be  possible  to 
connect  a  considerable  number  of  upright  spindles  with  one  wheel, 
and  thus  multiply  the  productive  power  of  each  spinster.  He  con- 
trived a  frame  in  one  part  of  which  he  placed  eight  rovings  in  a  row 
and  in  another  part  a  row  of  eight  spindles.  .  .  .  His  ignorant 
neighbors  hastily  concluded  that  a  machine  which  enabled  one  spin- 
ster to  do  the  work  of  eight  would  throw  multitudes  of  persons  out 
of  employment.  A  mob  broke  into  his  house  and  destroyed  his 
machine.  Hargreaves  himself  had  to  retire  to  Nottingham,  where, 
with  the  friendly  assistance  of  another  person,  he  was  able  to  take 
out  a  patent  for  the  spinning  jenny,  as  the  machine,  in  compliment 
to  his  industrious  wife,  was  called. 


ARKWRIGHT'S  WATER  FRAME 

The  invention  of  the  spinning  jenny  gave  a  new  impulse  to  the 
cotton  manufacture.  But  the  invention  of  the  spinning  jenny,  if 
it  had  been  accompanied  by  no  other  improvements,  would  not  have 
allowed  any  purely  cotton  goods  to  be  manufactured  in  England. 
The  yarn  spun  by  the  jenny,  like  that  which  had  previously  been 
spun  by  hand,  was  neither  fine  enough  nor  hard  enough  to  be  em- 
ployed as  warp,  and  linen  or  woolen  threads  had  consequently  to  be 
used  for  this  purpose.  In  the  very  year,  however  (1769),  in  which 
Hargreaves  moved  from  Blackburn  to  Nottingham,  Richard  Ark- 
wright  took  out  a  patent  for  his  still  more  celebrated  machine.  .  .  . 
The  principle  of  Arkwright's  great  invention  is  very  simple.  He 
passed  the  thread  over  two  pairs  of  rollers,  one  of  which  was  made  to 
revolve  much  more  rapidly  than  the  other.  The  thread,  after  pass- 
ing over  the  pair  revolving  slowly,  was  drawn  into  the  requisite 
tenuity  by  the  rollers  revolving  at  a  higher  rapidity.  By  this  simple 
but  memorable  invention  Arkwright  succeeded  in  producing  thread 
capable  of  employment  as  warp.  From  the  circumstance  that  the 
mill  at  which  his  machinery  was  first  erected  was  driven  by  water 
power,  the  machine  received  the  somewhat  inappropriate  name 
of  the  water  frame;  the  thread  spun  by  it  was  usually  called  the 
water  twist. 


THE  MANUFACTURING  INDUSTRIES  295 

PAUL'S  CARDING  MACHINE 

The  invention  of  the  fly  shuttle  by  John  Kay  had  enabled  the 
weavers  to  consume  more  cotton  than  the  spinsters  had  been  able  to 
provide ;  the  invention  of  the  spinning  jenny  and  the  water  frame 
would  have  been  useless  if  the  old  system  of  hand  carding  had  not 
been  superseded  by  a  more  efficient  and  more  rapid  process.  Just 
as  Arkwright  applied  rotatory  motion  to  spinning,  so  Lewis  Paul 
introduced  revolving  cylinders  for  carding  cotton.  Paul's  machine 
consisted  of  "a  horizontal  cylinder,  covered  in  its  whole  circum- 
ference with  parallel  rows  of  cards  with  intervening  spaces,  and 
turned  by  a  handle.  Under  the  cylinder  was  a  concave  frame  lined 
internally  with  cards  exactly  fitting  the  lower  half  of  the  cylinder, 
so  that  when  the  handle  was  turned  the  cards  of  the  cylinder  and  of 
the  concave  frame  worked  against  each  other  and  carded  the  wool." 
"  The  cardings  were  of  course  only  of  the  length  of  the  cylinder,  but 
an  ingenious  apparatus  was  attached  for  making  them  into  a  per- 
petual carding.  Each  length  was  placed  on  a  flat,  broad  riband, 
which  was  extended  between  two  short  cylinders,  and  which  wound 
upon  one  cylinder  as  it  unwound  from  the  other." 

CROMPTON'S  MULE 

This  extraordinary  series  of  inventions  placed  an  almost  unlimited 
supply  of  yarn  at  the  disposal  of  the  weaver.  But  the  machinery, 
which  had  been  thus  introduced,  was  still  incapable  of  providing 
yarn  fit  for  the  finer  qualities  of  cotton  cloth.  "The  water  frame 
spun  twist  for  warps,  but  it  could  not  be  advantageously  used  for  the 
finer  qualities,  as  thread  of  great  tenuity  has  not  strength  to  bear  the 
pull  of  the  rollers  when  winding  itself  on  the  bobbin."  This  defect, 
however,  was  removed  by  the  ingenuity  of  Samuel  Crompton,  a 
young  weaver  residing  near  Bolton.  Crompton  succeeded  (1774- 
1779)  in  combining  in  one  machine  the  various  excellences  of 
"  Arkwright's  water  frame  and  Hargreaves's  jenny."  Like  the  former, 
his  machine,  which  from  its  nature  is  happily  called  the  mule,  "has 
a  system  of  rollers  to  reduce  the  roving ;  and,  like  the  latter,  it  has 
spindles  without  bobbins  to  give  the  twist,  and  the  thread  is 
stretched  and  spun  at  the  same  time  by  the  spindles  after  the  rollers 
have  ceased  to  give  out  the  rove." 


296  PRINCIPLES  OF  NATIONAL  ECONOMY 

Before  Crompton's  time  it  was  thought  impossible  to  spin 
eighty  hanks  to  the  pound ;  the  mule  has  spun  three  hundred 
and  fifty  hanks  to  the  pound !  The  natives  of  India  could  spin 
a  pound  of  cotton  into  a  thread  one  hundred  and  nineteen  miles 
long;  the  English  succeeded  in  spinning  the  same  thread  to 
a  length  of  one  hundred  and  sixty  miles.  Yarn  of  the  finest 
quality  was  at  once  at  the  disposal  of  the  weaver,  and  an  oppor- 
tunity was  afforded  for  the  production  of  an  indefinite  quantity 
of  cotton  yarn.  But  the  great  inventions  which  have  thus  been 
enumerated  would  not  of  themselves  have  been  sufficient  to 
establish  the  cotton  manufacture  on  its  present  basis.  The 
ingenuity  of  Hargreaves,  Arkwright,  and  Crompton  had  been 
exercised  to  provide  the  weaver  with  yarn.  Their  inventions 
had  provided  him  with  more  yarn  than  he  could  by  any  possi- 
bility use.  The  spinster  had  beaten  the  weaver  just  as  the 
weaver  had  previously  beaten  the  spinster,  and  the  manufacture 
of  cotton  seemed  likely  to  stand  still  because  yarn  could  not 
be  woven  more  rapidly  than  an  expert  workman  with  Kay's 
improved  fly  shuttle  could  weave  it. 

CARTWRIGHT'S  POWER  LOOM 

Such  a  result  was  actually  contemplated  by  some  of  the  leading 
manufacturers,  and  such  a  result  might  possibly  have  temporarily 
occurred  if  it  had  not  been  averted  by  the  ingenuity  of  a  Kentish 
clergyman.  Edmund  Cartwright,  a  clergyman  residing  in  Kent, 
happened  to  be  staying  at  Matlock  in  the  summer  of  1784,  and  to 
be  thrown  into  the  company  of  some  Manchester  gentlemen.  The 
conversation  turned  on  Arkwright's  machinery,  and  "one  of  the 
company  observed  that  as  soon  as  Arkwright's  patent  expired  so 
many  mills  would  be  erected  and  so  much  cotton  spun  that  hands 
would  never  be  found  to  weave  it."  Cartwright  replied  "that  Ark- 
wright  must  then  set  his  wits  to  work  to  invent  a  weaving  mill."  The 
Manchester  gentlemen,  however,  unanimously  agreed  that  the  thing 
was  impracticable.  Cartwright  "controverted  the  impracticability 
by  remarking  that  there  had  been  exhibited  an  automaton  figure 
which  played  at  chess."  It  could  not  be  "more  difficult  to  construct 
a  machine  that  shall  weave  than  one  which  shall  make  all  the  variety 


THE  MANUFACTURING  INDUSTRIES  297 

of  moves  which  are  required  in  that  complicated  game.  Within  three 
years  he  had  himself  proved  that  the  invention  was  practicable  by 
producing  the  power  loom.  Subsequent  inventors  improved  the  idea 
which  Cartwright  had  originated,  and  within  fifty  years  from  the 
date  of  his  memorable  visit  to  Matlock  there  were  not  less  than  one 
hundred  thousand  power  looms  at  work  in  Great  Britain  alone.  .  .  . 
Such  are  the  leading  inventions  which  made  Great  Britain  in  less 
than  a  century  the  wealthiest  country  in  the  world.  .  .  . 

THE  STEAM  ENGINE  OF  NEWCOMEN  AND  WATT 

Steam  was  actually  used  early  in  the  eighteenth  century  as  a 
motive  power  for  pumping  water  from  mines ;  and  Newcomen,  a 
blacksmith  in  Dartmouth,  invented  a  tolerably  efficient  steam  engine. 
It  was  not,  however,  till  1769,  that  James  Watt,  a  native  of  Greenock 
and  a  mathematical-instrument  maker  in  Glasgow,  obtained  his  first 
patent  for  "  methods  of  lessening  the  consumption  of  steam,  and 
consequently  of  fuel,  in  fire  engines."  James  Watt  was  born  in  1736. 
His  father  was  a  magistrate,  and  had  the  good  sense  to  encourage 
the  good  turn  for  mechanics  which  his  son  displayed  at  a  very  early 
age.  At  the  age  of  nineteen  Watt  was  placed  with  a  mathematical- 
instrument  maker  in  London,  but  feeble  health,  which  had  interfered 
with  his  studies  as  a  boy,  prevented  him  from  pursuing  his  avocations 
in  England.  Watt  returned  to  his  native  country.  The  Glasgow 
body  of  Arts  and  Trades,  however,  refused  to  allow  him  to  exercise 
his  calling  within  the  limits  of  their  jurisdiction ;  and  had  it  not 
been  for  the  University  of  Glasgow,  which  befriended  him  in  his 
difficulty  and  appointed  him  their  mathematical-instrument  maker, 
the  career  of  one  of  the  greatest  geniuses  whom  Great  Britain  has 
produced  would  have  been  stunted  at  its  outset. 

There  happened  to  be  in  the  university  a  model  of  Newcomen's 
engine.  It  happened,  too,  that  the  model  was  defectively  constructed. 
Watt,  in  the  ordinary  course  of  his  business,  was  asked  to  remedy 
its  defects,  and  he  soon  succeeded  in  doing  so.  But  his  examination 
of  the  model  convinced  him  of  serious  faults  in  the  original.  New- 
comen had  injected  cold  water  into  the  cylinder  in  order  to  condense 
the  steam  and  thus  obtain  a  necessary  vacuum  for  the  piston  to 
work  in.  Watt  discovered  that  three  fourths  of  the  fuel  which  the 
engine  consumed  was  required  to  reheat  the  cylinder.  "It  occurred 


298  PRINCIPLES  OF  NATIONAL  ECONOMY 

to  him  that,  if  the  condensation  could  be  performed  in  a  separate 
vessel,  communicating  with  the  cylinder,  the  latter  could  be  kept  hot, 
while  the  former  was  cooled,  and  the  vapor  arising  from  the  injected 
water  could  also  be  prevented  from  impairing  the  vacuum.  The 
communication  could  easily  be  effected  by  a  tube,  and  the  water 
could  be  pumped  out.  This  is  the  first  and  the  grand  invention  by 
which  he  at  once  saved  three  fourths  of  the  fuel  and  increased 
the  power  one  fourth,  thus  making  every  pound  of  coal  produce 
five  times  the  force  formerly  obtained  from  it."  But  Watt  was  not 
satisfied  with  this  single  improvement.  He  introduced  steam  above 
as  well  as  below  the  piston,  and  thus  again  increased  the  power  of 
the  machine.  He  discovered  the  principle  of  parallel  motion,  and 
thus  made  the  piston  move  in  a  straight  line.  He  regulated  the 
supply  of  water  to  the  boiler  by  means  of  "floats,"  the  supply  of 
steam  to  the  cylinder  by  the  application  of  "the  governor,"  and,  by 
the  addition  of  all  these  discoveries,  "  satisfied  himself  that  he  had  al- 
most created  a  new  engine  of  incalculable  power,  universal  application, 
and  inestimable  value."  .  .  . 

The  steam  engine,  indeed,  would  not  have  been  invented  in  the 
eighteenth  century,  or  would  not  at  any  rate  have  been  discovered 
in  this  country,  if  it  had  not  been  for  the  vast  mineral  wealth  with 
which  Great  Britain  has  fortunately  been  provided.  .  .  . 

DUDLEY'S  METHOD  OF  SMELTING  IRON  WITH  COAL 

At  the  commencement  of  the  seventeenth  century  Dud  Dudley  .  .  . 
had  proved  the  feasibility  of  smelting  iron  with  coal ;  but  the  prej- 
udice and  ignorance  of  the  work  people  had  prevented  the  adoption 
of  his  invention.  In  the  middle  of  the  eighteenth  century,  attention 
was  again  drawn  to  his  process,  and  the  possibility  of  substituting 
coal  for  wood  was  conclusively  established  at  the  Darby's  works  at 
Coalbrook  Dale.  The  impetus  which  was  thus  given  to  the  iron 
trade  was  extraordinary.  The  total  produce  of  the  country  amounted 
at  the  time  to  only  18,000  tons  of  iron  a  year,  four  fifths  of  the  iron 
used  being  imported  from  Sweden.  In  1802  Great  Britain  possessed 
168  blast  furnaces,  and  produced  170,000  tons  of  iron  annually.  In 
1806  the  produce  had  risen  to  250,000  tons;  it  had  increased  in  1820 
to  400,000  tons.  Fifty  years  afterwards,  or  in  1870,  6,000,000  tons 
of  iron  were  produced  from  British  ores. 


THE  MANUFACTURING  INDUSTRIES  299 

The  progress  of  the  iron  trade  indicated,  of  course,,  a  correspond- 
ing development  of  the  supply  of  coal.  Coal  had  been  used  in  Eng- 
land for  domestic  purposes  from  very  early  periods.  Sea  coal  had 
been  brought  to  London ;  but  the  citizens  had  complained  that  the 
smoke  was  injurious  to  their  health,  and  had  persuaded  the  legislature 
to  forbid  the  use  of  coal  on  sanitary  grounds.  The  convenience  of 
the  new  fuel  triumphed,  however,  over  the  arguments  of  the  sani- 
tarians and  the  prohibitions  of  the  legislature,  and  coal  continued  to 
be  brought  in  constantly  though  slowly  increasing  quantities  to 
London.  Its  use  for  smelting  iron  led  to  new  contrivances  for  insur- 
ing its  economical  production. 

Decay  of  small  industries.  Scarcely  less  striking  would  be 
an  account  of  the  rise  of  machine  production  in  other  industries, 
following  the  use  of  steam  power  and  cheap  iron  and  steel. 
Shoe  manufacturing,  the  grinding  of  flour,  the  slaughtering  of 
meat-animals  and  the  curing  and  packing  of  meat,  the  manu- 
facture of  watches,  automobiles,  etc.,  and  various  other  indus- 
tries have  shown  the  same  tendency  toward  the  factory  sys- 
tem of  production.  Regarding  changes  in  our  own  country, 
Professor  Ely  writes1 : 

Let  the  reader  call  to  mind  the  many  things  in  our  economic  life 
which  the  world  never  saw  before.  He  will,  of  course,  think  at  once 
of  the  railway  and  of  steam  navigation,  and  of  other  applications  of 
steam  to  industry.  But  these  have  brought  other  important  new 
phenomena.  The  concentration  of  large  masses  of  working-people 
in  great  factories  of  which  they  own  no  part,  and  under  a  single 
employer,  such  as  we  see  daily,  is  something  new  for  skilled  me- 
chanics ;  not  that  nothing  of  the  kind  ever  existed  before,  but  its 
existence  is  so  much  more  common  and  affects  so  many  more  people 
that  in  its  social  aspects  it  is  new.  In  the  last  century,  and  in  pre- 
vious centuries  of  the  Middle  Ages,  artisans  owned  the  tools  which 
they  used,  and  after  they  had  fully  mastered  their  trades,  usually 
called  no  man  master,  but  worked  in  their  own  little  shops.  Even 
within  the  memory  of  the  author,  still  comparatively  a  young  man, 
this  condition  of  things  has  become  less  common.  The  smith,  under 

1  Richard  T.  Ely,  An  Introduction  to  Political  Economy,  pp.  55-57.  New 
York  Chautauqua  Press,  1889. 


300  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  spreading  tree,  of  whom  Longfellow  sang,  is  disappearing.  He 
has  left  the  cross-roads  in  the  little  village  and  now  works  in  a 
machine  shop.  His  friends,  the  carpenter  and  the  shoemaker,  have 
accompanied  him.  A  few  artisans  may  stay  to  do  repairing  and 
other  small  work,  but  the  cheaper  processes  of  vast  establishments 
have  rendered  this  migration  inevitable  for  the  many.  Only  the  few 
among  artisans  can  live  in  the  old  style. 


Houses  are  constructed  in  large  establishments  and  they  are  sent 
to  small  places  where  it  is  only  necessary  to  put  them  together. 
Merchants  have  also  been  obliged  to  leave  the  villages  where  they 
were  owners  of  independent  establishments,  to  seek  employment  in 
immense  city  retail  and  wholesale  shops,  because  the  railroad  has 
carried  their  customers  away  from  them. 

The  amount  of  production  increases  continually,  but  the  number 
of  separate  establishments  where  production  is  carried  on  decreases 
uninterruptedly.  Milling  serves  as  a  good  illustration.  "The  com- 
pletion of  the  great  mills  has  caused  the  abandonment  and  decay 
of  hundreds  of  the  picturesque,  old-fashioned  neighborhood  mills. 
In  1870,  according  to  the  census  of  that  year,  there  were  in  the 
entire  country  22,573  grist  mills,  58,448  hands,  representing  $151,- 
500,000  of  capital,  and  making  a  product  worth  $444,900,000.  In 
1880  the  number  of  establishments  was  24,338,  the  number  of  hands 
58,407,  the  capital  invested  $177,300,000,  and  the  value  of  the  prod- 
uct was  $505,100,000  (the  price  of  flour  had  declined  ten  per  cent 
in  this  decade).  The  increase  shown  in  the  number  of  establish- 
ments ...  is  more  apparent  than  real,  the  great  bulk  of  flour  having 
been  made  in  a  decidedly  smaller  number  of  mills  in  1880  than  in 
1870.  Since  1880  the  blighting  effect  of  the  great  merchant  mills 
upon  the  small  establishments  has  become  visible  to  every  one.  Ac- 
cording to  the  Miller's  Directory  for  1884,  .  .  .  there  were  at  that 
time  some  22,940  mills  in  the  country,  a  decline  of  1398  from  the 
census  figures  of  1880.  .  .  .  From  1884  to  1886  .  .  .  the  number 
of  milling  establishments  has  declined  to  16,856  ...  a  loss  in  two 
years  of  more  than  twenty-six  per  cent."  The  number  of  mills  in 
the  South  has  declined  more  rapidly  than  elsewhere.  In  1880,  in 
North  Carolina  1313  mills  employed  only  1844  men,  but  in  the  same 


THE  MANUFACTURING  INDUSTRIES  301 

state  there  were  only  632  mills  in  1886.  It  is  said  that  the  number 
of  mills  in  the  country  is  destined  to  become  very  much  smaller  still. 
Readers  can  readily  gather  from  census  and  trade  reports  many 
similar  illustrations  of  this  concentration  of  business,  which  is  one 
of  the  main  causes  of  the  existence  of  present  problems. 


Tendency  of  mechanically  expert  nations  toward  indoor  indus- 
tries. Large  portions  of  the  world's  population  still  remain  in  a 
condition  of  mechanical  inexpertness.  They  find  it  more  ad- 
vantageous to  live  from  the  products  of  the  soil,  exchanging 
these  for  the  manufactured  products  of  the  mechanically  ex- 
pert. Other  populations,  like  those  of  our  own  West,  while 
mechanically  expert,  occupy  land  of  such  abundance  and  fer- 
tility that  they  find  it  more  profitable  to  cultivate  land  than 
to  turn  to  the  indoor  industries.  They  use  their  mechanical 
expertness  in  contriving  and  operating  farm  machinery.  They 
exchange  their  large  surplus  of  farm  products  for  the  manu- 
factured products  of  other  people  who  are  mechanically  expert 
and  who  occupy  lands  of  less  extent  and  lower  fertility.  The 
latter,  not  having  vast  areas  to  cultivate,  find  less  profitable 
opportunities  for  their  mechanical  expertness  out  of  doors  than 
indoors.  Therefore  they  develop  the  indoor  industries.  Eng- 
land, which  got  a  good  start  ahead  of  the  rest  of  the  world  in 
this  line  of  development,  prospered  amazingly.  The  eastern 
part  of  the  United  States,  together  with  France,  Belgium,  Hol- 
land, and  (lately)  Germany,  has  been  following  in  the  same 
direction.  As  this  tendency  increases,  the  competition  among 
the  indoor  industries  is  likely  to  become  so  intense  as  to  reduce 
the  profits  and  drive  a  certain  percentage  of  the  people  back 
to  the  farms. 

Taking  the  United  States  as  a  whole,  it  is  rapidly  ceasing 
to  be  primarily  an  agricultural  country  and  is  becoming  a  manu- 
facturing country,  following  a  similar  development  in  England 
and  northwestern  Europe.  Already  more  than  half  of  our 
people  live  in  towns  of  twenty-five  hundred  or  more.  Canada, 
South  America,  Australia,  South  Africa,  and  all  countries  colo- 


302  PRINCIPLES  OF  NATIONAL  ECONOMY 

nized  by  white  men  will  doubtless  follow  in  the  same  direction. 
There  will  then  be  left  only  the  tropics  in  which  to  sell  the 
surplus  products  of  manufacture  and  from  which  to  draw  the 
surplus  products  of  the  soil.  It  is  probable  that  the  devel- 
opment of  the  indoor  industries  will  be  checked  before  that 
state  is  reached.  In  that  case  each  country  will  have  to  pre- 
serve a  balance,  or  equilibrium,  between  the  indoor  and  the 
outdoor  industries. 

As  pointed  out  in  the  chapter  on  The  Genetic  Industries,  the 
advance  in  civilization  and  the  general  improvement  of  living 
conditions  tend  to  add  to  the  relative  importance  of  the  indoor 
as  compared  with  the  outdoor  industries.  The  finer  the  goods 
we  demand,  the  more  work  we  make,  generally  speaking,  for 
the  indoor  workers.  Even  farm  work  itself  comes,  in  a  sense, 
to  be  done  indoors  rather  than  outdoors.  The  substitution  of 
the  tractor  for  the  horse  may  serve  to  illustrate  this  statement. 
The  raising  of  horses  is  outdoor  work ;  the  manufacturing  of 
tractors  is  indoor  work.  If  we  use  more  tractors  and  fewer 
horses  a  larger  proportion  of  our  workers  will  work  indoors  and 
a  smaller  proportion  outdoors. 

This  is  a  process  which  must  be  expected  to  continue  even 
though  we  remain  a  self-sufficing  nation.  If,  ceasing  to  be  a 
self-sufficing  nation,  we  bring  raw  materials  and  products  of  the 
soil  from  distant  portions  of  the  earth  and  send  in  exchange 
the  more  refined  products  of  the  indoor  industries,  we  must 
expect  that  manufacturing  will  become  in  larger  and  larger 
degree  our  dominant  occupation. 


CHAPTER  XXI 
TRANSPORTATION 

Moving  things  over  long  distances.  Since  all  industry  con- 
sists in  moving  materials  from  one  place  to  another,  it  follows 
as  a  matter  of  course  that  transportation  must  form  an  impor- 
tant part  of  the  industrial  system.  That  which  we  call  trans- 
portation differs,  however,  from  other  kinds  of  work  in  that  it 
consists  in  moving  materials  over  long  distances, — distances 
which  are  measured  in  miles  rather  than  in  inches,  feet,  or 
yards.  The  transportation  system  has  been  likened  to  the  veins 
and  arteries  of  the  physiological  organism,  just  as  the  telegraph 
and  telephone  systems  have  been  likened  to  the  nerves. 

The  development  of  the  factory  system  as  described  in  the 
preceding  chapter  and  of  large-scale  production  in  general 
would  have  been  impossible  without  cheap  transportation. 

The  railway  and  the  factory  have  gone  hand  in  hand  in  their 
development  and  in  their  economic  results.  With  the  means  of 
transportation  which  existed  two  hundred  years  ago  large  industries 
would  have  been  impossible.  The  substitution  of  turnpikes  for  com- 
mon roads,  of  canals  for  turnpikes,  and  of  railways  for  canals  was 
as  essential  a  part  of  industrial  progress  as  was  the  development  of 
the  factory  system.1 

Without  a  wide  market  on  which  to  sell  its  large  product  a 
large  factory  or  manufacturing  establishment  would  be  an  im- 
possibility. In  the  days  of  restricted  local  markets,  when  each 
little  community  was  almost  self -sufficing,  small  shops  having 
individual  handicraftsmen  could  supply  the  needs  of  each  such 
unit.  Not  the  least  important  of  the  changes  which  have  come 
about  since  the  middle  of  the  eighteenth  century  has  been  the 

1  President  A.  T.  Hadley,  Transportation,  in  Palgrave's  "  Dictionary  of 
Political  Economy." 

303 


304  PRINCIPLES  OF  NATIONAL  ECONOMY 

battering  down  of  the  walls  which  divided  one  restricted  mar- 
ket from  another  and  the  creation  of  nation-wide  or  world-wide 
markets  instead  of  a  series  of  local,  restricted  markets. 

The  widening  of  the  market.  Cheap  transportation,  more 
than  anything  else,  has  made  possible  the  development  of  nation- 
wide and  world-wide  markets.  Raw  materials  sometimes  have 
to  be  brought  long  distances,  especially  in  a  case  where  several 
different  kinds  of  raw  material  enter  into  the  making  of  a  given 
product.  These  different  kinds  of  raw  material  are  not  always 
found  in  close  juxtaposition.  The  iron  ore  of  the  Lake  Superior 
region  would  be  practically  useless,  because  of  its  distance  from 
the  coal  fields,  were  it  not  for  cheap  transportation  on  the  Great 
Lakes,  by  means  of  which  it  can  be  carried  almost  to  the  mouths 
of  the  coal  mines  of  Illinois,  Indiana,  Ohio,  and  Pennsylvania. 

In  other  cases  the  raw  material  itself  is  produced  over  such 
wide  areas  as  to  make  centralized  and  large-scale  production  an 
impossibility  without  cheap  transportation.  The  slaughtering 
of  meat  animals  and  the  curing  and  packing  of  the  meat  is  a 
case  in  point.  These  animals  must  be  grown  on  the  farms  and 
ranges,  which  cover  considerable  areas.  Without  cheap  trans- 
portation they  would  have  to  be  slaughtered  and  consumed 
nearer  the  sources  of  production ;  with  cheap  transportation 
they  may  be  sent  to  a  few  large  packing  centers,  and  from  these 
centers  the  meat  can  be  distributed  over  practically  the  whole 
country  and  over  considerable  portions  of  the  civilized  world. 
Without  cheap  transportation  every  large  city  would  be  depend- 
ent upon  the  supply  of  meat  that  could  be  grown  within  driving- 
distance;  that  is,  within  such  distances  as  the  animals  could 
travel  on  foot.  They  would  have  to  be  slaughtered  near  each 
center  of  consumption  in  order  that  the  meat  might  be  dis- 
tributed economically.  Without  cheap  transportation  the  cot- 
ton industry  of  New  England  could  never  have  developed  to 
such  proportions  as  it  has.  The  raw  material  is  all  produced 
hundreds  of  miles,  and  most  of  it  thousands  of  miles,  away 
from  the  factories.  The  manufactured  product,  in  turn,  is  dis- 
tributed over  the  entire  country  and  considerable  portions  of 


TRANSPORTATION  305 

the  civilized  world.  Every  description  of  the  Industrial  Revo- 
lution in  England  gives  great  attention  to  the  cotton  and  woolen 
industries,  for  it  was  in  these  industries  that  the  transition  was 
most  striking.  And  perhaps  the  most  striking  feature  was  the 
long  distances  over  which  the  material  had  to  be  transported  . 
and  the  wide  markets  in  which  the  finished  product  could  then 
be  sold.  Before  the  development  of  the  railways,  water  trans- 
portation was  the  only  cheap  form,  and  England  was  peculiarly 
well  situated  with  respect  to  ocean  transportation. 

However  great  the  economies  of  large-scale  production  may 
be,  if  the  cost  of  transportation  were  as  great  as  it  once  was,  the 
small  producer,  using  locally  produced  raw  materials  and  sell- 
ing on  a  local  market,  would  save  so  much  on  the  cost  of  trans- 
portation as  to  give  him  an  advantage  over  the  biggest  factory 
located  a  long  distance  away.  The  cheaper  transportation  be- 
comes, the  less  the  saving  of  transportation  costs  will  figure  as 
an  advantage  in  industry.  Every  industry  will  then  tend  to  be 
located  in  the  place  where  other  advantages  are  greatest.  When 
freight  costs  one  cent  per  ton  per  mile,  one  can  readily  see  that 
one  could  ship  a  suit  of  clothes  weighing,  say,  ten  pounds  a  long 
distance  without  adding  perceptibly  to  the  cost  of  the  suit.  The 
freight  for  a  thousand  miles  would  be  only  five  cents.  If  it 
cost  twenty-five  cents  per  ton  per  mile,  distance  would  be  a 
very  large  factor  in  the  location  of  a  clothing  industry. 

Water  transportation  developed  first.  Historically,  water 
transportation  was  cheapened  long  before  we  had  cheap  land 
transportation.  Consequently  we  find  that  commerce  in  a  large 
sense  developed  first  on  the  water.  Great  cities  were  located 
where  there  were  advantages  in  water  transportation.  Consid- 
erable commerce  has  always  been  carried  on,  from  the  very 
earliest  times,  by  means  of  caravans  traveling  over  land,  but 
the  cost  of  this  kind  of  transportation  was  so  great  that  the 
commerce  which  developed  under  these  conditions  was  neces- 
sarily confined  to  articles  of  luxury  which  embodied  large  value 
in  small  bulk.  "The  wealth  of  the  Indies,"  as  that  term  was 
used  in  Europe,  consisted  of  silks,  gold  and  silver  and  precious 


306  PRINCIPLES  OF  NATIONAL  ECONOMY 

stones,  and  a  few  rare  delicacies  for  the  very  rich.  Some  con- 
siderable cities,  however,  developed  along  these  overland  routes. 
Damascus  and  Palmyra  in  Western  Asia,  Troyes  and  Nurem- 
berg in  Europe,  may  be  cited  as  examples.  But  the  great  cities 
developed  along  water  routes ;  Canton,  Hankow,  Calcutta, 
Delhi,  Nineveh,  Babylon,  Bagdad,  Tyre,  Constantinople,  Mem- 
phis, Alexandria,  Venice,  Genoa,  Antwerp,  and  London  may  be 
cited  as  examples. 

Water  transportation  developed  first,  of  course,  where  it  was 
safe ;  that  is,  on  rivers  or  small  bodies  of  inclosed  water.  The 
great  rivers  were  the  first  great  routes  for  cheap  transportation. 
The  valleys  of  the  Nile,  the  Euphrates,  the  Tigris,  the  Ganges, 
and  the  Yangtse  developed  great  civilizations,  partly  because 
they  contained  good  soil  and  opportunities  for  irrigation  but 
also  because  they  furnished  means  of  transportation. 

The  keel  and  the  compass.  The  next  stage  was  reached  when 
the  sailors  ventured  beyond  the  mouths  of  the  rivers  along  the 
adjacent  coasts  and  in  inclosed  seas  like  the  ^gean,  the  Medi- 
terranean, and  the  Baltic.  The  difficulty  of  navigation  in  those 
days  was  such  as  to  make  an  ocean  voyage  extremely  hazardous, 
if  at  all  possible.  The  boats  of  those  early  days  were  flat- 
bottomed  (that  is,  they  had  no  keels) ;  it  was  therefore  impos- 
sible to  sail  in  the  teeth  of  the  wind.  Sails  could  be  used  only 
when  the  wind  was  favorable ;  that  is,  when  it  blew  almost  in 
the  direction  in  which  the  sailors  wanted  to  go.  At  other  times 
they  had  to  depend  upon  large  numbers  of  oars  worked  by 
human  muscles.  The  galley  slave  was  a  part  of  that  system 
of  transportation  by  human  muscles.  With  the  keel  boat  and 
the  mariner's  compass  the  use  of  sails  was  greatly  enlarged,  and 
sailors  could  venture  out  on  the  open  ocean.  There  is  some 
dispute  as  to  the  origin  of  the  keel,  but  whenever  or  wherever 
it  was  invented,  it  must  be  regarded  as  one  of  the  great  inven- 
tions of  history,  for  it  enabled  the  sailor  to  sail  almost  into  the 
teeth  of  the  wind  and,  by  skillful  tacking,  to  go  anywhere  he 
wanted  to,  regardless  of  the  direction  of  the  wind.  A  little 
later  the  mariner's  compass  came  into  use,  by  means  of  which 


TRANSPORTATION  307 

the  sailor  could  venture  out  of  sight  of  land  and  still  keep  his 
bearings  and  reach  his  destination. 

With  these  two  inventions  in  their  possession  sailors  could 
now  leave  not  only  the  rivers  but  the  inclosed  seas  and  venture 
away  from  the  seacoasts  and  traverse  the  broad,  uncharted 
ocean.  Columbus  never  would  have  dared  to  venture  on  his 
quest  of  an  ocean  route  to  India  without  these  two  inventions. 

The  world  faces  on  the  ocean.  As  a  result  of  the  discoveries 
of  Columbus,  Vasco  da  Gama,  and  others  the  world  is  said  to 
have  faced  about.  The  various  nations  had  formerly  faced 
inward,  with  their  backs  to  the  ocean ;  the  land  united  peoples, 
but  the  ocean  divided  them.  Since  that  time  they  have  tended 
to  face  outward  (that  is,  to  face  the  ocean),  and  it  is  now  said 
that  the  land  divides,  but  the  ocean  unites.  While  distances  are 
great  over  these  ocean  routes,  the  building  of  larger  ships  pro- 
pelled either  by  steam  or  by  wind  has  made  ocean  transporta- 
tion the  cheapest  of  all  forms.  Where  time  is  not  a  factor  the 
huge  sailing  vessels  can  carry  freight  thousands  of  miles  more 
cheaply  than  it  can  be  carried  hundreds  of  miles  even  on  our 
best  railways.  Where  time  is  a  factor  the  cost  is  slightly  greater, 
but  still  ocean  freight  rates  are  amazingly  low.  The  question  of 
economizing  power  and  that  of  economizing  time  seem  some- 
times to  come  into  conflict.  The  sailing  vessel  is  the  greatest 
economizer  of  power,  but  it  is  not  economical  of  time. 

The  order  of  development  of  water  transportation  has  been 
described  as,  first,  the  potamic  stage ;  second,  the  thalassic ; 
and,  third,  the  oceanic.  The  following  outline  indicates  roughly 
the  general  types  of  transportation  now  in  use  : 

["  Potamic 
Water  X  Thalassic 
I  Oceanic 

T  Man  power 

f  Paths,  roads,  and  streets  S  Animal  power 
TRANSPORTATION*!  T  ,,    .      ; , 

Land  -j  Railways  I  Mechanical  power 

I  Tramways 


308  PRINCIPLES  OF  NATIONAL  ECONOMY 

The  most  primitive  trade  routes  were  probably  paths  trav- 
ersed by  human  beings  carrying  their  own  loads.  Beasts  of 
burden  were,  however,  utilized  very  early  for  this  purpose.  The 
accounts  of  early  explorers  in  Central  Africa  describe  the 
great  forest  as  penetrated  by  a  network  of  paths  running  from 
one  village  to  another,  so  that  a  traveler  could  cross  the  conti- 
nent by  persistently  following  these  paths.  The  great  caravan 
routes  mentioned  above,  across  the  desert  and  open  country, 
made  use  of  animals  as  beasts  of  burden. 

Whdels.  A  wheeled  vehicle  is  a  great  advance  over  the  carry- 
ing of  loads  on  the  backs  either  of  men  or  of  animals.  In  some 
of  the  backward  districts  of  China,  porters  still  carry  huge 
loads,  and  it  is  amazing  what  loads  a  man  can  carry  who  has 
been  trained  to  it  all  his  life.  But  where  the  road  is  made 
suitable  for  wheeled  vehicles  the  porter  can  haul  about  three 
times  as  much  as  he  can  carry.  On  a  paved  street  or  a  macad- 
amized road  in  this  country  a  pair  of  good  horses  will  haul  from 
two  to  four  tons,  whereas  about  six  hundred  pounds  is  a  load 
for  a  pack  horse.  Even  on  the  common  dirt  roads  of  the  coun- 
try, when  they  are  reasonably  well  kept  and  not  muddy,  a  pair 
of  horses  will  haul  from  a  ton  and  a  half  to  two  tons. 

Most  people  use  roads  and  streets  more  than  they  use  rail- 
roads, though  it  is  difficult  to  say  that  one  is  more  important 
than  the  other.  They  are  all  so  interlocked  and  interdependent 
that  it  is  hard  to  treat  them  separately.  For  short  distances  we 
must,  of  course,  depend  upon  roads  and  streets,  using  the 
railroad  for  transportation  over  long  distances  and  the  hauling 
of  heavier  loads. 

Animal  power.  On  the  roads  and  streets  man  power  is  still 
used,  as  suggested  above,  in  some  backward  countries.  It  is 
cheap  only  when  labor  is  very  cheap.  A  man  can  live  on  much 
less  grain  than  is  required  to  feed  a  horse.  If  a  man  is  willing 
to  live  largely  on  a  grain  diet  it  will  hardly  pay  him  to  keep  a 
horse  where  grain  is  very  scarce.  Where  the  population  is  so 
dense  that  it  is  necessary  to  conserve  every  ounce  of  food,  and 
men  are  reduced  to  the  barest  necessities  of  life,  it  is  uneconomi- 


TRANSPORTATION  309 

cal  to  use  animal  power  except  for  heavy  loads  which  are  too 
great  for  human  muscles.  Where  there  is  land  enough  to  pro- 
vide food  not  only  for  human  beings  but  for  animals  the  use  of 
animal  power  becomes  economical,  because  much  more  work 
can  be  done,  more  land  cultivated,  more  goods  transported, 
and  thus  the  animals  can  be  fed  and  still  leave  more  to  supply 
human  needs  than  would  otherwise  be  produced. 

Mechanical  power.  There  is  a  tendency  at  the  present  time 
to  substitute  mechanical  power  for  animal  power  even  on  the 
roads  and  streets.  The  development  of  the  automobile  and  the 
auto  truck  is  opening  up  great  possibilities  in  this  direction. 
It  is  not  probable,  however,  that  mechanical  power  will  entirely 
displace  animal  power,  any  more  than  that  animal  power  could 
entirely  displace  human  power.  The  tendency  in  our  civilized 
communities  is  for  the  use  of  human  power  for  transportation 
purposes  to  be  confined  to  shorter  and  shorter  distances ;  carry- 
ing goods  from  the  grocer's  delivery  wagon  to  the  kitchen  door, 
carrying  coal  from  the  curbstone  to  the  cellar,  moving  goods 
within  warehouses,  etc.  will  probably  continue  to  be  done  by 
human  muscles  for  some  time  to  come.  A  similar  development 
will  probably  take  place  with  respect  to  animal  power.  For  long 
distances  and  the  carrying  of  heavy  loads  the  auto  truck  will 
probably  prove  increasingly  economical,  but  for  short  distances 
the  horse  is  still  and  will  probably  continue  for  some  time  to 
be  more  economical.  The  economy  of  the  auto  truck,  how- 
ever, depends  upon  the  character  of  the  roads.  With  the 
common  dirt  roads  which  formerly  prevailed  in  the  country  it 
is  doubtful  if  it  could  have  been  used  economically  even  if  it 
had  been  developed. 

Better  tracks.  It  is  interesting  to  note  how  every  advance  in 
methods  of  land  transportation  seems  to  depend  upon  the  quality 
of  the  road  or  track.  Wheeled  vehicles  could  be  substituted  for 
pack  saddles  only  when  there  were  roads  suitable  for  wheeled 
vehicles.  Well-kept  roads  and  paved  streets  are  necessary 
before  mechanical  power  can  be  substituted  for  animal  power 
in  ordinary  hauling.  The  acme  of  track-building  is  the  railway, 


310  PRINCIPLES  OF  NATIONAL  ECONOMY 

where  the  wheeled  vehicle  runs  on  steel  rails.  The  friction  and 
loss  of  power  between  the  wheel  and  the  track  is  reduced  to 
the  minimum.  In  a  similar  way  the  modern  locomotive  is 
the  climax  of  the  development  of  mechanical  power.  Thus  the 
improvement  in  mechanical  devices  goes  hand  in  hand  with  the 
improvement  in  road  or  track.  Ever  since  the  first  building  of 
railways  and  the  use  of  locomotive  engines  this  parallel  de- 
velopment has  continued.  The  first  locomotives  were  small  and 
crude  affairs  as  compared  with  the  magnificent  engines  which 
now  haul  our  freight  and  passenger  trains.  The  powerful  en- 
gines of  today,  however,  could  scarcely  run  on  the  old-fashioned 
railway  track,  with  its  light  iron  rails.  Improvement  in  the 
manufacture  of  the  steel  rail  has  had  to  go  hand  in  hand  with 
the  improvement  of  the  locomotive  engine. 

Railways.  It  may  seem  strange  to  young  people  to  be  told 
that  there  are  men  now  living  who  can  remember  when  there 
were  no  railways.  Such  men,  of  course,  are  now  somewhat 
rare,  but  the  fact  remains  that  the  present  age  of  the  railway 
does  not  exceed  the  span  of  a  reasonably  long  human  life.  The 
railway  mileage  of  the  world  has  increased  by  leaps  and  bounds. 
In  no  country  has  the  development  of  the  railway  kept  pace 
with  its  development  in  the  United  States,  though  in  proportion 
to  their  need  for  railway  transportation  England  and  Germany 
have  kept  close  behind  us.  Our  area  is  so  vast  and  our  people 
have  been  spreading  so  rapidly  over  this  vast  area  that  a 
great  demand  for  transportation  facilities  has  been  created.  In 
addition  we  have  had  an  abundance  of  material  for  their  con- 
struction. Moreover,  our  people  have  shown  a  great  deal  of 
initiative  and  enterprise  in  pushing  the  business.  In  some 
countries  this  spirit  of  enterprise  has  been  so  lacking  that  the 
governments  themselves  have  had  to  take  hold  of  the  matter 
and  build  the  roads  at  government  expense. 

Public  or  private  railways.  The  problem  of  railway  manage- 
ment, however,  has  been  a  very  difficult  one  in  every  country. 
In  one  sense  the  railway  system  would  seem  to  belong  to  the 
general  system  of  streets,  roads,  and  highways.  The  general 


TRANSPORTATION  311 

experience  of  mankind  has  shown  that  streets,  roads,  and  high- 
ways should  be  public  rather  than  private.  This  has  led  to  the 
assumption  that  railways  should  be  treated  similarly.  There 
is,  however,  this  important  difference.  On  the  streets,  roads, 
and  highways  private  individuals  use  their  own  vehicles,  travel 
freely,  and  go  and  come  when  they  please.  The  actual  work  of 
transportation,  therefore,  is  not  carried  on  by  the  public.  This 
method  would  be  impossible  on  a  railway.  The  trains  must 
run  on  schedule  time  and  under  a  well-administered  system; 
otherwise  there  would  be  nothing  but  confusion  and  inefficiency 
and  multitudinous  wrecks.  If  the  public  undertakes  to  own  the 
railways  it  would  have  to  go  much  farther  than  it  does  when  it 
owns  the  streets  and  highways.  It  would  either  have  to  operate 
all  the  vehicles  (that  is,  trains)  or  lease  the  road  to  a  single 
company  which  would  have  the  exclusive  use  of  the  tracks. 
Obviously  even  two  independent  individuals  or  companies  could 
not  operate  trains  on  the  same  track.  There  are,  therefore,  two 
analogies  which  may  be  drawn  between  the  highway  system 
and  the  railway  system.  Since  the  government  owns  the  high- 
ways one  group  of  people,  reasoning  by  analogy,  say  that  the 
government  ought  to  own  the  railways.  On  the  other  hand,  it 
is  asserted  that  since  private  individuals  operate  the  vehicles 
that  are  used  on  the  highways,  and  the  government  is  not  in  the 
transportation  business  at  all,  a  similar  rule  should  prevail  with 
respect  to  railway  transportation — private  individuals  or  com- 
panies should  do  the  hauling  and  therefore  own  the  railway.  In 
this  country  we  have  followed  the  latter  principle,  but  it  has 
made  necessary  a  considerable  regulation  of  the  companies 
which  do  the  hauling.  A  third  possibility  is  that  the  govern- 
ment should  build  and  own  the  tracks  and  then  lease  them  to 
operating  companies. 

Monopolistic  character  of  a  railway.  From  the  very  nature 
of  the  case  a  railway  must  be  operated  as  a  monopoly  or  quasi 
monopoly.  As  suggested  above,  it  would  be  impossible  for  even 
two  companies  to  run  trains  on  the  same  track  or  over  the  same 
railway  system  unless  one  became  absolutely  subject  to  the 


312  PRINCIPLES  OF  NATIONAL  ECONOMY 

administrative  rules  of  the  other.  This  quasi-monopolistic  char- 
acter of  the  railway  has  given  the  management  more  control 
over  rates  than  individual  draymen,  freighters,  cabmen,  etc.  can 
exercise  over  freight  and  passenger  rates  in  the  vehicles  that  are 
operated  on  public  highways.  In  order  to  hold  in  check  this 
quasi-monopolistic  power  of  the  railway  a  great  deal  of  legisla- 
tion has  been  enacted  in  this  country,  beginning  with  the  granger 
laws  of  the  seventies  and  eighties  of  the  last  century  and  cul- 
minating in  the  Interstate  Commerce  Act  of  1887  and  the  sub- 
sequent development  of  the  powers  of  the  Interstate  Commerce 
Commission.  This  commission  now  has  power  to  prescribe 
rates  and  to  exercise  general  control  and  supervision  over  the 
administration  of  all  the  railways  of  the  country. 

Short-distance  and  long-distance  hauling.  In  several  coun- 
tries, such  as  Germany,  Switzerland,  Australia,  and  others,  the 
opposite  alternative  has  been  chosen.  The  government  has 
built  and  continues  to  operate  the  railways.  In  Germany  it  was 
primarily  a  military  enterprise ;  in  order  that  she  might  build 
up  her  military  power  and  be  able  to  concentrate  vast  armies 
and  supply  them  at  any  point,  she  needed  a  well-articulated 
railway  system.  In  this  respect  her  policy  resembled  that 
of  the  Romans,  who  were  great  road  builders  in  their  day. 
Their  system  of  roads  enabled  them  to  march  their  armies 
rapidly  from  one  part  of  the  Empire  to  another,  to  concentrate 
wherever  concentration  was  needed,  and  thus  to  outmaneuver 
their  enemies. 

As  to  the  effects  of  the  two  systems  on  peaceful  commerce, 
there  are  many  different  opinions.  In  some  respects  freight 
rates  are  more  favorable  in  Germany  than  in  the  United  States ; 
in  others  they  are  much  more  favorable  in  the  United  States. 
No  railway  system  in  the  world  compares  with  that  of  the 
United  States  in  the  cheapness  and  swiftness  of  long-distance 
freight.  Our  railways,  however,  have  given  comparatively  little 
attention  to  local  freight.  In  the  efficiency  and  cheapness  with 
which  local  freight  is  handled  they  are  far  behind  the  railroads 
not  only  of  Germany,  where  the  government  owns  and  operates 


TRANSPORTATION  313 

the  roads,  but  also  of  England,  where  they  are  operated  by 
private  companies.  The  difference,  therefore,  is  probably  not 
to  be  accounted  for  on  the  ground  of  public  or  private  owner- 
ship. In  a  densely  populated  country,  where  the  distances  are 
never  very  great,  it  would  be  quite  natural  that  short-distance, 
or  local,  freight  should  form  a  large  part  of  the  business  of  the 
railroad ;  whereas  in  a  country  of  such  vast  expanse  as  ours 
it  would  be  equally  natural  that  long-distance  freight  should 
form  the  chief  part  of  the  railroad  business.  Each  railway 
system,  therefore,  tends  to  specialize  in  that  field  where  its  chief 
business  lies. 

Arguments  against  both  sides.  No  final  conclusion  is  possi- 
ble as  to  the  relative  merits  of  public  and  private  management. 
As  Sir  Roger  de  Coverley  was  in  the  habit  of  saying,  "Much 
might  be  said  on  both  sides."  Each  side  has  its  partisans,  and 
each  partisan  seems  peculiarly  unable  to  appreciate  the  weak- 
nesses of  his  own  side  and  the  strong  points  on  the  opposite  side. 
In  reading  these  arguments  one  gets  the  impression  that  there  is 
very  little  to  be  said  in  favor  of  either,  but  much  that  can  be  said 
against  both.  The  arguments  against  private  ownership  and 
operation  are  based  mainly  on  the  monopolistic  character  of  the 
railroad  business,  the  rapacity  of  railroad  managers,  and  the 
general  distrust  of  "big  business."  The  arguments  against  pub- 
lic ownership  and  operation  are  based  mainly  upon  the  ineffi- 
ciency of  public  business,  the  danger  that  politics  rather  than 
business  needs  will  determine  rates  and  other  details  of  the 
business,  and  the  general  distrust  of  the  politician. 

These  considerations  might  very  properly  convince  one  that 
the  same  system  is  not  necessarily  the  best  for  all  countries.  In 
a  country  which  is  dominated  by  autocratic  and  military  stand- 
ards, where  business  is  contemptuously  spoken  of  as  "shop- 
keeping,"  where  government  service  attracts  a  better  class  of 
men  than  business  attracts,  and  where  men  are  chosen  for  high 
positions  not  because  of  their  talkativeness  or  popularity  but 
because  of  their  knowledge  and  efficiency,  the  objections  to 
public  ownership  and  operation  are  weak  and  those  against 


314  PRINCIPLES  OF  NATIONAL  ECONOMY 

private  ownership  and  operation  are  weighty.  In  a  country, 
however,  which  is  dominated  by  democratic  ideals,  where  busi- 
ness and  all  honest  occupations  have  always  been  regarded  as 
just  as  honorable  as  government  or  military  service,  where,  on 
the  whole,  business  attracts  a  better  class  of  men  than  politics, 
and  where  men  are  chosen  for  high  public  positions  mainly  on 
the  ground  of  their  ability  to  make  stump  speeches  rather  than 
on  the  ground  of  their  knowledge  and  efficiency,  the  objections 
to  government  ownership  and  operation  are  very  strong  and 
those  against  private  ownership  and  operation  are  relatively 
weak.  There  is  a  strong  probability,  however,  that  the  persua- 
sive talkers  will  be  able  to  enlarge  their  powers,  at  the  expense 
of  the  efficient  doers,  by  persuading  the  voters  to  intrust  more 
and  more  power  to  them,  the  talkers. 


CHAPTER  XXII 

MERCHANDISING 

Personal  utility.  In  a  previous  chapter  it  was  pointed  out 
that  three  kinds  of  utility  are  produced  by  human  industry, — 
form  utility,  place  utility,  and  time  utility.  It  would  be  pos- 
sible, if  one  cared  to  draw  somewhat  finer  distinctions,  to 
speak  of  personal  utility  as  a  special  phase  of  place  utility,  or, 
on  the  other  hand,  personal  utility  could  be  named  as  a  fourth 
kind.  When  an  object  is  transferred  from  a  person  who  has 
no  use  for  it  to  a  person  who  has  a  use  for  it,  its  utility,  or 
power  to  satisfy  desires,  is  increased  by  the  transfer,  just  as 
truly  as  though  it  were  transferred  from  a  locality  where  it  is 
not  needed  to  a  locality  where  it  is  needed. 

There  is  an  ancient  fallacy  to  the  effect  that  someone  must 
gain  and  someone  must  lose  in  every  trade.  This  fallacy  has 
been  exploded  so  often  that  it  hardly  seems  necessary  to  repeat 
the  process  here.  Two  farmers  may  trade  horses  and  both  gain. 
A  wool-grower  who  has  a  surplus  of  wool  and  a  shoemaker  who 
has  a  surplus  of  shoes  may  exchange  products  to  the  advantage 
of  both.  A  boy  who  has  a  surplus  of  marbles  but  a  deficit  of 
taffy  might  advantageously  exchange  some  of  his  surplus 
marbles  for  taffy,  carrying  on  the  exchange  with  another  boy 
who  had  a  surplus  of  taffy  but  a  deficit  of  marbles.  By  this 
process  the  personal  utility  of  both  marbles  and  taffy  would 
be  increased. 

Merchandising  may  be  productive  of  utility.  If  it  is  agreed 
that  the  power  of  goods  to  satisfy  wants  is  increased  when 
they  get  into  the  possession  of  the  people  who  really  need 
them,  it  ought  not  to  be  difficult  to  see  that  the  individual 
who  facilitates  this  process  is  a  productive  individual ;  that  is, 

315 


316  PRINCIPLES  OF  NATIONAL  ECONOMY 

his  work  results  in  increased  utility.  Even  if  we  leave  trans- 
portation and  the  storing  of  goods  out  of  account  for  the  pres- 
ent and  consider  merely  the  transfer  of  goods  from  one  person 
to  another  in  the  same  locality,  we  shall  find  that  unless  there 
were  merchants  or  mercantile  houses  the  various  producers 
would  find  difficulty  in  making  the  necessary  exchanges.  The 
farmer  with  a  surplus  of  wheat  might  have  some  difficulty  in 
finding  a  shoemaker  who  wanted  wheat  and  was  willing  to 
exchange  shoes  for  wheat.  Under  a  highly  developed  mercan- 
tile system  a  farmer  can  always  find  buyers  for  his  wheat. 
He  can  also  find  a  shoe  store  where  he  can  buy  shoes,  a  clothing 
store  where  he  can  buy  clothing,  and  so  on. 

These  men  who  specialize  in  trading  are  sometimes  called 
middlemen,  and  it  is  not  difficult  to  see  that  they  are  not  only 
exceedingly  useful  but  in  some  cases  absolutely  necessary.  It 
may  sometimes  happen  that  too  many  middlemen  intervene 
between  the  producer  and  the  consumer,  but  some  middlemen 
are  absolutely  necessary  unless  the  producer  will  undertake  to 
peddle  his  products  around  among  consumers  or  unless  the 
consumers  will  undertake  to  search  for  producers  who  have 
for  sale  exactly  what  they  (the  consumers)  desire  to  purchase. 
An  immense  amount  of  time  and  trouble  is  saved  when  every 
producer  can  sell  directly  to  a  middleman  and  go  on  about  his 
work  of  production,  while  at  the  same  time  every  consumer  can 
purchase  exactly  what  he  wants  from  some  merchant. 

The  middleman  as  a  timesaver.  Generally  speaking,  it  will  be 
observed  that  in  any  community  where  the  average  person  con- 
siders his  time  to  be  valuable,  there  are  a  great  many  middle- 
men intervening  between  producers  and  consumers  and  very 
little  direct  marketing.  In  a  community,  however,  where  wages 
and  incomes  are  low  and  the  average  person  finds  his  time  of 
very  little  value,  comparatively  few  middlemen  intervene  be- 
tween producer  and  consumer,  and  there  is  a  great  deal  of 
direct  bartering.  The  open  market  place,  where  producers  and 
consumers  meet,  flourishes  in  communities  of  the  latter  type 
but  not  in  communities  of  the  former  type. 


MERCHANDISING  317 

There  is  an  old  adage  that  time  is  money.  Where  time  is 
valuable  it  is  economized;  where  it  is  of  little  value  it  is 
not  economized.  Where  the  average  housekeeper  considers  her 
time  valuable  she  does  not  care  to  spend  much  time  marketing 
and  dickering  with  producers  who  bring  their  stuff  to  market. 
She  prefers  to  market  by  telephone.  This  is  a  great  saving  of 
time,  but  it  is  generally  expensive  in  terms  of  money.  She  is 
literally  paying  somebody  else  to  do  for  her  that  which  she 
might  do  for  herself  if  she  cared  to  go  to  market  and  deal 
directly  with  the  producers.  Similarly,  where  the  producer  con- 
siders his  time  valuable  he  would  prefer  to  sell  his  product  in 
bulk  to  some  middleman  rather  than  to  spend  his  time  in  dicker- 
ing with  consumers  and  selling  his  product  in  small  lots.  The 
system  of  direct  marketing  saves  money,  it  is  true,  but  it  wastes 
time;  the  system  of  indirect  marketing  saves  time  but,  in  a 
sense,  wastes  money.  The  problem  in  economy  which  every 
producer  and  every  consumer  must  decide  for  himself  is  whether 
his  time  is  worth  as  much  as  the  money  which  he  might  other- 
wise save. 

The  peasant  women  of  certain  overcrowded  countries,  who 
are  unable  to  do  farm  work  and  have  very  little  else  in  the  way 
of  remunerative  work  which  they  can  do,  find  going  to  market 
a  means  of  saving  money.  They  can  sell  directly  to  the  con- 
sumers and  cut  out  middlemen's  costs  and  profits.  Since  they 
consider  their  time  as  worth  practically  nothing,  every  penny 
which  they  can  save  in  this  way  adds  so  much  to  the  family 
income.  The  American  farmer,  with  a  somewhat  higher  stand- 
ard of  living,  and  the  farmer's  wife,  who  considers  her  time  as 
worth  something,  if  not  for  earning  money  by  remunerative 
work,  at  least  for  housekeeping  or  self-cultivation,  refuses  to 
spend  her  time  in  this  way.  Therefore  it  is  very  difficult  in 
this  country  to  maintain  a  system  of  direct  marketing.  It  is 
the  belief,  however,  of  many  students  of  the  problem  that 
the  Americans  have  gone  too  far  in  the  direction  of  saving 
time, — so  far,  in  fact,  as  to  waste  more  money  than  necessary 
in  middlemen's  costs  and  profits. 


318  PRINCIPLES  OF  NATIONAL  ECONOMY 

Marketing  sometimes  a  social  function.  Another  factor  en- 
ters into  the  success  of  public  markets,  where  producer  and 
consumer  meet.  In  those  countries  where  the  system  still  pre- 
vails, going  to  market  has  become  a  social  function.  The 
market  place  is  the  place  where  citizens  meet  and  where  the 
women  make  their  social  calls  and  pay  their  social  obligations. 
This  phase  of  the  question  has  played  a  very  important  part  in 
history.  The  Roman  Forum,  for  example,  was  simply  the 
market  place,  in  which  the  farmers  from  the  surrounding  coun- 
try and  the  people  of  the  city  of  Rome  met,  primarily  for 
purposes  of  exchange  and  secondarily  for  purposes  of  social 
intercourse  and  political  discussion.  The  latter  functions  grad- 
ually displaced  the  former,  and  the  Roman  Forum  gradually 
became  the  center  of  Roman  politics  and  eventually  the  center 
of  the  world.  The  Olympic  games,  which  were  for  many  cen- 
turies the  center  of  Greek  life,  developed  in  connection  with  a 
fair  which  was  held  for  the  exchange  of  products.  While  the 
Greek  people  were  busy  with  their  exchanges  the  young  men 
took  part  in  athletic  and  intellectual  contests ;  eventually  these 
contests  became  the  chief  feature,  and  the  mercantile  function 
almost  disappeared  from  sight. 

The  social  function  of  going  to  market  has  been  revived  in  a 
number  of  ways  in  recent  times.  Great  department  stores,  in 
order  to  attract  trade, — especially  that  of  ladies  who  have  time 
for  social  diversion, — have  introduced  the  paraphernalia  of  the 
drawing  room,  with  pink  teas  and  other  accessories.  They  are 
deliberately  striving  to  make  afternoon  shopping  a  social  diver- 
sion, thus  restoring,  in  the  field  of  the  marketing  of  frills,  some 
of  the  features  which  originally  developed  in  connection  with 
the  marketing  of  the  necessaries  of  life. 

Buying  large  quantities  and  selling  in  small  parcels.  Another 
very  important  function  performed  by  the  mercantile  house  is 
that  of  receiving  products  in  large  quantities  from  the  producer 
and  dividing  them  into  small  parcels  for  the  consumer.  This 
breaking  up  into  small  parcels  is  a  work  of  utility ;  it  meets  the 
convenience  of  both  producer  and  consumer.  The  convenience 


MERCHANDISING  319 

of  the  producer  is  met  by  his  ability  to  sell  in  bulk ;  the  con- 
venience of  the  consumer  is  met  by  his  ability  to  buy  in  small 
parcels.  This  may,  without  doing  violence  to  our  language,  be 
called  a  kind  of  form  utility.  The  goods  are  bought  in  one 
form  and  sold  in  another.  There  is  a  certain  analogy  between 
this  process  of  breaking  goods  up  into  small  parcels  and  the 
process  of  manufacturing,  in  which  the  forms  of  goods  are 
changed  in  other  ways. 

Storing  goods.  One  of  the  most  important  functions  of  the 
mercantile  class,  however,  is  that  of  storing  goods.  In  fact,  it 
is  still  customary  to  speak  of  certain  mercantile  houses  as 
stores.  The  storing  of  goods  produces  time  utility.  They  are 
kept  from  a  point  in  time  when  they  are  not  especially  needed 
until  a  time  when  they  are  especially  needed.  Their  utility  is 
thus  increased.  This  function  of  storing  goods  is  particularly 
important  in  the  case  of  goods  which  are  produced  by  a  seasonal 
industry,  such  as  agriculture.  The  wheat  is  harvested  during 
one  period  of  the  year,  but  needs  to  be  consumed  during  the 
entire  year.  Unless  someone  were  ready  to  store  this  product, 
it  would  have  to  be  used  very  inefficiently  at  one  period  of  the 
year,  and  there  would  be  a  scarcity  at  another  period. 

Utility  of  storing  without  monopolizing.  Contrary  to  a  cer- 
tain popular  belief,  the  effect  of  storing  vast  quantities  of  farm 
products  in  warehouses  is  beneficial  rather  than  otherwise.  No 
speculator  or  warehouse  owner  would  have  any  motive  for 
storing  products  except  that  of  getting  a  higher  price  later. 
He  could  not  get  a  higher  price  later  unless  the  goods  were 
scarcer  later.  If  they  are  scarcer  later  it  is  very  much  to  the 
interest  of  society  that  they  be  stored  rather  than  consumed  at 
once.  During  the  period  of  high  prices  accompanying  the 
World  War — say  in  May,  1917 — it  was  found  that  a  great  deal 
of  grain  was  being  stored  up.  There  naturally  developed  a  cer- 
tain popular  dissatisfaction.  Being  shortsighted,  we  did  not 
appreciate  what  was  likely  to  be  our  situation  several  months 
later.  The  only  thing  we  saw  was  that  prices  were  distressingly 
high.  We  saw  this  in  connection  with  another  fact;  namely, 


320  PRINCIPLES  OF  NATIONAL  ECONOMY 

that  large  quantities  of  wheat  were  being  stored.  We  thought, 
naturally  enough,  that  if  that  wheat  were  taken  out  of  storage 
and  sold  at  once,  prices  would  not  be  so  high.  If,  however,  we 
had  been  a  little  more  farsighted  we  should  have  looked  ahead 
and  considered  what  the  situation  would  be  later.  If  wheat  is 
going  to  be  more  abundant  at  some  time  in  the  future  than  now 
the  price  will  fall.  If  that  were  the  expectation  nobody  would 
be  willing  to  store  a  single  bushel  of  wheat  until  that  time. 
Everybody  would  want  to  sell  his  wheat  at  once.  If  those  who 
are  in  a  position  to  judge  believe  that  wheat  will  be  scarcer  in 
July  than  in  May,  and  the  price  therefore  higher,  they  find  it  to 
their  interest  to  store  up  these  products  and  hold  them.  If  they 
are  correct  in  their  anticipation  it  is  also  very  important  for 
society  at  large  that  they,  or  somebody,  should  store  up  wheat ; 
otherwise  we  should  consume  wastefully  this  month  and  go 
hungry  later  on.  It  ought  not  to  take  very  much  forethought  or 
reasoning  power  to  understand  this.  It  is,  however,  a  sad  com- 
mentary on  the  shortsightedness  of  many  of  our  people  and 
even  of  men  in  high  political  positions  that  this  is  so  imperfectly 
understood  and  that  we  are  so  generally  resentful  toward  those 
who  are  performing  this  important  function  of  storing. 

Another  fact  which  should  be  taken  into  consideration  is  that 
formerly  large  numbers  of  people,  both  producers  and  con- 
sumers, did  their  own  storing,  whereas  at  the  present  time  that 
work  is  turned  over  to  a  special  group  of  men  who  own  eleva- 
tors, cold-storage  warehouses,  and  other  storage  facilities.  In 
a  less  highly  organized  state  of  society  many  farmers  saved 
grain  in  their  own  bins,  and  potatoes,  fruit,  and  vegetables  in 
their  own  cellars.  At  the  same  time  many  consumers  bought 
supplies  in  advance  and  stored  them  in  their  own  cellars.  At 
the  present  time  comparatively  few  farmers  hold  their  prod- 
ucts, finding  it  cheaper  to  sell  them  as  soon  as  produced  than  to 
build  and  maintain  their  own  storehouses  and  run  their  own  risk 
of  loss  or  deterioration  of  the  products.  Moreover,  consumers 
have  generally  got  out  of  the  habit  of  buying  supplies  in  ad- 
vance and  keeping  them  stored  until  needed,  finding  it  cheaper 


MERCHANDISING  321 

to  order  supplies  as  they  are  needed,  depending  upon  other 
people  to  do  the  storing.  While  both  producer  and  consumer 
are  turning  this  work  over  to  a  special  class,  they  must  not 
forget  that  the  only  motive  which  this  special  class  has  for  do- 
ing this  special  work  is  the  hope  of  a  profit.  If  they  can  make 
a  profit  and  still  furnish  the  service  cheaper  than  producers 
and  consumers  can  furnish  it  for  themselves,  they  have  earned 
their  profit. 

Cornering,  or  monopolizing,  is  destructive  of  utility.  We 
should  be  careful,  however,  to  distinguish  between  storing  for 
sale  on  a  competitive  market  and  monopolizing  for  sale  on  what 
is  known  as  a  cornered  market.  If  there  were  collusion  among 
all  those  who  own  warehouses  or  who  are  in  a  position  to  store 
products, — an  agreement  to  control  the  supply  and  fix  prices 
artificially, — there  would  be  a  real  grievance,  and  the  individ- 
uals who  are  guilty  of  such  a  practice  should,  of  course,  be  very 
severely  dealt  with.  But  if  we  can  once  satisfy  ourselves  that 
the  products  are  being  stored  for  sale  on  a  competitive  market, 
we  can  rest  perfectly  easy  in  our  minds,  because  no  one  could 
make  any  money  by  storing  in  this  way  unless  it  were  genuine 
social  service  to  do  so.  By  social  service,  of  course,  we  do  not 
mean  philanthropic  service,  but  merely  useful  work. 

Standardization.  Another  very  important  function  performed 
by  the  mercantile  class  is  what  is  known  as  the  classification, 
or  standardization,  of  goods.  The  producer  of  farm  products 
especially  cannot  produce  goods  of  uniform  kind  and  quality. 
On  every  apple  tree  there  will  be  apples  of  various  grades,  and 
in  every  large  orchard  likewise.  In  every  poultry  yard  there 
will  be  fowls  of  different  qualities.  The  consumer  who  tried  to 
purchase  directly  from  the  farm  might  not  find  exactly  the 
grade  or  quality  which  he  desired.  When  the  farmer  sells  his 
products  in  bulk  the  middleman  will  frequently  classify  or 
grade  them  into  a  large  number  of  grades.  Take  such  a  simple 
product,  for  example,  as  broilers.  It  is  very  difficult  for  one 
poultryman  to  produce  a  large  number  of  broilers  all  of  the 
same  size,  weight,  quality,  and  general  condition.  A  hotel  or 


322  PRINCIPLES  OF  NATIONAL  ECONOMY 

restaurant,  however,  wishes  to  treat  all  customers  alike.  It  does 
not  wish  to  buy  broilers  in  a  nondescript,  or  ungraded,  mass. 
If  it  did  so  one  customer  would  get  one  kind  of  dish  and  another 
customer  another  kind,  varying  in  size  and  quality.  This  would 
produce  dissatisfaction.  A  dealer  buys  broilers  from  a  large 
number  of  poultrymen  and  classifies  them  very  minutely. 
There  are  said  to  be  over  one  hundred  different  grades  and 
classes.  Each  hotel  and  restaurant  and  every  private  consumer 
can  get  from  such  a  dealer  exactly  what  he  wants.  Multitudes 
of  other  illustrations  could  be  given,  but  enough  has  been  said 
to  show  that  merchandising  is  a  very  important  factor  in  the 
economy  of  human  energy  and  the  promotion  of  national 
prosperity. 

Deception  always  destruction.  It  is  quite  certain,  however, 
that  certain  practices  will  grow  up  in  connection  with  merchan- 
dising which  are  reprehensible.  The  ancient  Greeks  regarded 
Hermes,  or  Mercury,  not  only  as  the  herald  of  the  gods  but 
also  as  the  god  of  boundaries,  markets,  and  weights  and  meas- 
ures, and  as  the  special  patron  of  merchants,  gamblers,  and 
thieves.  There  is  probably  no  branch  of  human  industry  or 
business  which  lends  itself  so  easily  to  deception  and  adultera- 
tion and  which  furnishes  such  temptations  to  high-pressure  ad- 
vertising and  salesmanship.  The  old  adage  that  honesty  is  the 
best  policy  is  doubtless  appreciated  by  merchants  of  the  better 
class,  but  unfortunately  there  are  always  a  good  many  men  who 
are  doing  some  kind  of  merchandising  to  whom  this  adage 
seems  more  theoretical  than  practical.  The  arts  of  persuasion 
are  developed  to  a  high  degree  of  proficiency  and  pass  easily 
over  into  the  arts  of  deception.  The  justification  given  is  gen- 
erally summed  up  in  the  words  "business  is  business."  It  is 
not  necessary  to  present  any  arguments  to  show  that  deception 
contributes  nothing  to  national  prosperity.  What  one  gains  by 
deception,  someone  else  necessarily  loses.  It  is  probably  this 
phase  of  the  question  that  has  led  to  the  hasty  conclusion,  which 
is  far  too  widely  accepted,  that  somebody  always  loses  in  a 
trade.  That  general  conclusion  was  combated  at  the  beginning 


MERCHANDISING  323 

of  this  chapter.    In  so  far  as  trading  takes  the  form  of  decep- 
tion, however,  the  conclusion  is  entirely  justified. 

Advertising.  Advertising  occupies  a  prominent  place  among 
the  forms  in  which  the  art  of  persuasion  is  carried  to  a  high  state 
of  development  in  modern  times.  To  what  extent  advertising  is 
economically  justified  has  been  a  difficult  question  and  must  re- 
main so.  Advertising  is  sometimes  educational.  The  individual 
sometimes  learns  the  price  of  things  from  advertisements,  also 
where  he  can  get  something  which  he  really  wants  and  has 
wanted  for  a  long  time.  Without  the  advertisement  he  might 
have  found  difficulty  in  getting  it.  This  applies,  however,  mainly 
to  new  products  that  have  recently  been  put  upon  the  market. 
One  scarcely  needs  an  advertisement  to  tell  one  of  the  existence 
of  soap  or  codfish  or  to  acquaint  one  with  the  fact  that  such 
things  are  to  be  purchased  at  stores.  In  many  cases  of  this  kind 
the  only  effect  of  advertising  is  to  persuade  the  consumer  to  use 
one  man's  product  rather  than  another's.  One  producer  realizes 
that  if  he  does  not  advertise,  consumers  may  buy  the  other 
man's  product.  The  other  man  is  then  compelled  to  advertise 
in.  order  to  defend  himself  against  the  first  advertiser,  and  thus 
it  becomes  a  race,  or  contest,  to  get  the  customer's  trade,  and 
no  addition  whatever  is  made  to  the  national  wealth  or  to  the 
well-being  of  society.  It  is  not  improbable  that  eventually  the 
public  will  exercise  its  authority  and  use  its  power  of  com- 
pulsion to  limit  or  redirect  the  advertising  business.  This, 
however,  would  be  a  somewhat  dangerous  experiment,  because 
such  public  authority  would  have  to  be  exercised  by  public  offi- 
cers. The  worst  forms  of  advertising  are  not  found  among  mer- 
chants but  among  candidates  for  public  office.  The  man  who 
has  succeeded  in  getting  elected  to  office  by  campaigning,  which 
is  a  kind  of  advertising,  is  not  necessarily  the  best  man  to  de- 
cide upon  what  is  good  and  what  is  bad  advertising  either  in 
political  campaigning  or  in  merchandising. 


CHAPTER  XXIII 
PERSONAL  AND  PROFESSIONAL  SERVICES 

Causing  productivity  in  others.  Falstaff  said,  "I  am  not  only 
witty  in  myself,  but  the  cause  that  wit  is  in  other  men."  There 
are  many  men  and  women  in  every  community  who  are  not 
directly  producing  wealth,  but  who  are  the  cause  of  produc- 
tivity in  others.  The  teacher  who  trains  students  in  the  pro- 
ductive arts  is;  to  say  the  least,  a  cause  of  productivity  and 
becomes  a  contributor  to  national  prosperity.  The  singer,  the 
poet,  and  the  artist  who  inspire  to  strenuous  action  and  noble 
deeds  likewise  contribute  their  share  to  the  greatness  of  the 
nation.  The  military  band  is  a  part  of  the  fighting  strength  of 
the  army,  even  though  its  members  never  handle  a  destructive 
weapon  of  any  kind. 

The  teacher,  the  preacher,  the  musician,  the  poet,  and  the 
artist,  however,  sometimes  forget  their  function  in  a  great 
nation  and  at  times  seem  almost  to  imagine  that  they  are  the 
objects  for  which  the  nation  exists.  At  any  rate  they  have  been 
known  to  go  so  far  as  to  resent  the  idea  that  they  have  a  purpose 
beyond  that  of  contributing  to  knowledge  for  its  own  sake  or 
art  for  its  own  sake. 

The  social  function  of  art,  religion,  etc.  Quite  different  was 
the  attitude  of  a  great  French  artist  when  he  found  his  country 
in  the  throes  of  the  life-and-death  struggle  which  began  with 
the  invasion  of  1914.  Speaking  before  a  gathering  of  French 
artists,  he  said  that  in  that  crisis  no  art  would  be  tolerated 
"which  was  not  noble,  robust,  proud,  and  an  inciter  of  high 
thoughts  and  delicate  sentiments — an  art  of  heroic  joy."  Fac- 
ing the  future,  he  continued:  "You  would  not  tolerate  any- 
thing less  today.  Then  why  should  you  tolerate  anything  less 


PERSONAL  AND  PROFESSIONAL  SERVICES        325 

hereafter,  in  that  tomorrow  when  our  duties  shall  be  changed  ?" 
Here  was  a  full  acceptance  of  the  view  that  art  has  an  end 
beyond  itself  and  is  not  its  own  excuse  for  being. 

Upon  this  topic  the  words  of  Thomas  Carlyle  are  not  only 
instructive  but  inspiring  as  well: 

Two  men  I  honor,  and  no  third.  First,  the  toilworn  Craftsman 
that  with  earth-made  Implement  laboriously  conquers  the  Earth,  and 
makes  her  man's.  Venerable  to  me  is  the  hard  Hand ;  crooked, 
coarse,  wherein  notwithstanding  lies  a  cunning  virtue,  indefeasibly 
royal,  as  of  the  Scepter  of  this  Planet.  Venerable  too  is  the  rugged 
face,  all  weather-tanned,  besoiled,  with  its  rude  intelligence ;  for  it 
is  the  face  of  a  Man  living  manlike.  O,  but  the  more  venerable  for 
thy  rudeness,  and  even  because  we  must  pity  as  'well  as  love  thee ! 
Hardly-entreated  Brother !  For  us  was  thy  back  so  bent,  for  us  were 
thy  straight  limbs  and  fingers  so  deformed :  thou  wert  our  Conscript, 
on  whom  the  lot  fell,  and  fighting  our  battles  wert  so  marred  .  .  . 

A  second  man  I  honor,  and  still  more  highly :  Him  who  is  seen 
toiling  for  the  spiritually  indispensable ;  not  daily  bread,  but  the 
bread  of  Life.  Is  not  he  too  in  his  duty ;  endeavoring  towards  in- 
ward Harmony ;  revealing  this,  by  act  or  by  word,  through  all  his 
outward  endeavors,  be  they  high  or  low?  Highest  of  all,  when  his 
outward  and  his  inward  endeavor  are  one :  when  we  can  name  him 
Artist ;  not  earthly  Craftsman  only,  but  inspired  Thinker,  who  with 
heaven-made  Implement  conquers  Heaven  for  us!  If  the  poor  and 
humble  toil  that  we  have  Food,  must  not  the  high  and  glorious  toil 
for  him  in  return,  that  he  have  Light,  have  Guidance,  Freedom, 
Immortality? — These  two,  in  all  their  degrees,  I  honor:  all  else  is 
chaff  and  dust,  which  let  the  wind  blow  whither  it  listeth. 

Government.  The  officers  of  the  government  who  preserve 
order  and  protect  lives  and  property  contribute  a  large  share  to 
national  prosperity.  An  army,  whose  business  may  seem  to  be 
destruction  rather  than  production,  by  protecting  against  inva- 
sion from  without  and  insurrection  and  disorder  from  within 
may  be  an  indispensable  factor  in  prosperity. 

It  is,  of  course,  possible  to  have  too  many  so-called  non- 
producers,  not  only  in  the  army  but  in  public  offices  of  different 


326  PRINCIPLES  OF  NATIONAL  ECONOMY 

kinds  as  well  as  in  the  various  talking  and  ornamental  profes- 
sions. The  work  of  the  soldier,  for  example,  is  one  of  the  most 
honorable  of  all  professions  so  long  as  national  defense  is  neces- 
sary, but  even  the  professional  soldier  himself  will  generally 
agree  that  it  would  be  an  excellent  thing  if  war  could  be  elimi- 
nated and  the  work  of  the  soldier  made  unnecessary.  The  same 
reasoning  may  be  applied  to  many  other  occupations.  No  work 
is  more  beneficent  and  honorable  than  that  of  the  physician ; 
but  every  physician,  if  he  be  worthy  of  the  name,  is  working  for 
the  elimination  or  prevention  of  disease.  If  it  were  possible  to 
carry  this  work  to  completion  it  would  greatly  reduce  the  need 
for  physicians.  Litigation  among  the  citizens  of  the  nations  is, 
so  far  as  it  goes,  almost  as  wasteful  as  war  between  nations. 
If  it  could  be  eliminated  it  would  greatly  reduce  the  demand  for 
lawyers.  An  army  of  very  able  and  talented  men  would  thus  be 
released  for  other  kinds  of  work  for  which  the  need  persists. 
The  best  lawyers,  like  the  soldiers  and  physicians,  frankly 
recognize  this  and  are  willing  to  work  to  reduce  the  amount 
of  litigation. 

Productive  and  unproductive  labor.  Economists  have  gener- 
ally recognized  a  distinction  between  productive  and  unproduc- 
tive labor,  but  they  have  not  always  agreed  as  to  the  line  of 
division.  Adam  Smith1  wrote: 

There  is  one  sort  of  labor  which  adds  to  the  value  of  the  subject 
upon  which  it  is  bestowed :  there  is  another  which  has  no  such  effect. 
The  former,  as  it  produces  a  value,  may  be  called  productive ;  the 
latter,  unproductive  labor.  Thus  the  labor  of  a  manufacturer  adds, 
generally,  to  the  value  of  the  materials  which  he  works  upon,  that  of 
his  own  maintenance,  and  of  his  master's  profit.  The  labor  of  a 
menial  servant,  on  the  contrary,  adds  to  the  value  of  nothing. 
Though  the  manufacturer  has  his  wages  advanced  to  him  by  his 
master,  he,  in  reality,  costs  him  no  expense,  the  whole  of  those  wages 
being  generally  restored,  together  with  a  profit,  in  the  improved  value 
of  the  subject  upon  which  his  labor  is  bestowed.  But  the  mainte- 
nance of  a  menial  servant  never  is  restored.  A  man  grows  rich  by 

irThe  Wealth  of  Nations,  Vol.  I,  pp.  332-334.    Clarendon  Press,  Oxford,  1880. 


PERSONAL  AND  PROFESSIONAL  SERVICES         327 

• 

employing  a  multitude  of  manufacturers :  he  grows  poor  by  main- 
taining a  multitude  of  menial  servants.  The  labor  of  the  latter,  how- 
ever, has  its  value,  and  deserves  its  reward  as  well  as  that  of  the 
former.  But  the  labor  of  the  manufacturer  fixes  and  realises  itself 
in  some  particular  subject  or  vendible  commodity,  which  lasts  for 
some  time  at  least  after  that  labor  is  past.  It  is,  as  it  were,  a  certain 
quantity  of  labor  stocked  and  stored  up  to  be  employed,  if  necessary, 
upon  some  other  occasion.  That  subject,  or,  what  is  the  same  thing, 
the  price  of  that  subject,  can  afterwards,  if  necessary,  put  into  motion 
a  quantity  of  labor  equal  to  that  which  had  originally  produced  it. 
The  labor  of  the  menial  servant,  on  the  contrary,  does  not  fix  or 
realise  itself  in  any  particular  subject  or  vendible  commodity.  His 
services  generally  perish  in  the  very  instant  of  their  performance,  and 
seldom  leave  any  trace  or  value  behind  them,  for  which  an  equal 
quantity  of  service  could  afterward  be  procured. 

The  labor  of  some  of  the  most  respectable  orders  in  society  is, 
like  that  of  menial  servants,  unproductive  of  any  value,  and  does  not 
fix  or  realise  itself  in  any  permanent  subject,  or  vendible  commodity, 
which  endures  after  that  labor  is  past,  and  for  which  an  equal 
quantity  of  labor  could  afterwards  be  procured.  The  sovereign,  for 
example,  with  all  the  officers  both  of  justice  and  war  who  serve  under 
him,  the  whole  army  and  navy,  are  unproductive  laborers.  They  are 
the  servants  of  the  public,  and  are  maintained  by  a  part  of  the  annual 
produce  of  the  industry  of  other  people.  Their  service,  how  honor- 
able, how  useful,  or  how  necessary  soever,  produces  nothing  for  which 
an  equal  quantity  of  service  can  afterwards  be  procured.  The  pro- 
tection, security,  and  defence  of  the  commonwealth,  the  effect  of 
their  labor  this  year,  will  not  purchase  its  protection,  security,  and 
defence  for  the  year  to  come.  In  the  same  class  must  be  ranked  some 
both  of  the  gravest  and  most  important,  and  some  of  the  most  friv- 
olous professions :  churchmen,  lawyers,  physicians,  men  of  letters 
of  all  kinds ;  players,  buffoons,  musicians,  opera-singers,  opera- 
dancers,  etc.  The  labor  of  the  meanest  of  these  has  a  certain  value, 
regulated  by  the  very  same  principles  which  regulate  that  of  every 
other  sort  of  labor,  and  that  of  the  noblest  and  most  useful  produces 
nothing  which  could  afterwards  purchase  or  procure  an  equal  quantity 
of  labor.  Like  the  declamation  of  the  actor,  the  harangue  of  the 
orator,  or  the  tune  of  the  musician,  the  work  of  all  of  them  perishes 
in  the  very  instant  of  its  production. 


328  PRINCIPLES  OF  NATIONAL  ECONOMY 

* 
Both  productive  and  unproductive  laborers,  and  those  who  do  no 

labor  at  all,  are  all  equally  maintained  by  the  annual  produce  of  the 
land  and  labor  of  the  country.  This  produce,  how  great  soever,  can 
never  be  infinite,  but  must  have  certain  limits.  Accordingly,  there- 
fore, as  a  smaller  or  greater  proportion  of  it  is  in  any  one  year 
employed  in  maintaining  unproductive  hands,  the  more  in  the  one 
case  and  the  less  in  the  other  will  remain  for  the  productive,  and  the 
next  year's  produce  will  be  greater  or  smaller  accordingly  ;  the  whole 
annual  produce,  if  we  except  the  spontaneous  productions  of  the 
earth,  being  the  effect  of  productive  labor. 

John  Stuart  Mill1  makes  use  of  the  same  distinction  in  the 
following  paragraphs,  though  he  modifies  it  so  as  to  allow  for 
labor  which  is  mediately,  or  indirectly,  productive. 


LABOR  IS  INDIRECTLY  AS  WELL  AS  DIRECTLY  PRODUCTIVE 

I  shall  therefore,  in  this  treatise,  when  speaking  of  wealth,  under- 
stand by  it  only  what  is  called  material  wealth,  and  by  productive 
labor  only  those  kinds  of  exertion  which  produce  utilities  embodied 
in  material  objects.  But  in  limiting  myself  to  this  sense  of  the  word, 
I  mean  to  avail  myself  to  the  full  extent  of  that  restricted  accepta- 
tion, and  I  shall  not  refuse  the  appellation  productive  to  labor  which 
yields  no  material  product  as  its  direct  result,  provided  that  an  in- 
crease of  material  products  is  its  ultimate  consequence.  Thus,  labor 
expended  in  the  acquisition  of  manufacturing  skill,  I  class  as  pro- 
ductive, not  in  virtue  of  the  skill  itself,  but  of  the  manufactured 
products  created  by  the  skill,  and  to  the  creation  of  which  the  labor 
of  learning  the  trade  is  essentially  conducive.  The  labor  of  officers 
of  government  in  affording  the  protection  which,  afforded  in  some 
manner  or  other,  is  indispensable  to  the  prosperity  of  industry,  must 
be  classed  as  productive  even  of  material  wealth,  because  without  it, 
material  wealth,  in  anything  like  its  present  abundance,  could  not 
exist.  Such  labor  may  be  said  to  be  productive  indirectly  or  medi- 
ately, in  opposition  to  the  labor  of  the  ploughman  and  the  cotton 
spinner,  which  are  productive  immediately.  They  are  all  alike  in  this, 

1  Principles  of  Political  Economy  (from  the  fifth  London  edition),  Bk.  I, 
chap,  iii,  p.  76.  New  York,  1909. 


PERSONAL  AND  PROFESSIONAL  SERVICES        329 

that  they  leave  the  community  richer  in  material  products  than  they 
found  it ;  they  increase  or  tend  to  increase  material  wealth. 

By  unproductive  labor,  on  the  contrary,  will  be  understood  labor 
which  does  not  terminate  in  the  creation  of  material  wealth ;  which, 
however  largely  or  successfully  practised,  does  not  render  the  com- 
munity and  the  world  at  large  richer  in  material  products,  but  poorer 
by  all  that  is  consumed  by  the  laborers  while  so  employed. 

All  labor  is,  in  the  language  of  political  economy,  unproductive, 
which  ends  in  immediate  enjoyment,  without  any  increase  of  the 
accumulated  stock  or  permanent  means  of  enjoyment.  And  all  labor, 
according  to  our  present  definition,  must  be  classed  as  unproductive, 
which  terminates  in  a  permanent  benefit,  however  important,  pro- 
vided that  an  increase  of  material  products  forms  no  part  of  that 
benefit.  The  labor  of  saving  a  friend's  life  is  not  productive,  unless 
the  friend  is  a  productive  laborer,  and  produces  more  than  he 
consumes.  To  a  religious  person  the  saving  of  a  soul  must  appear 
a  far  more  important  service  than  the  saving  of  a  life ;  but  he  will 
not  therefore  call  a  missionary  or  a  clergyman  productive  laborers, 
unless  they  teach,  as  the  South  Sea  Missionaries  have  in  some  cases 
done,  the  arts  of  civilization  in  addition  to  the  doctrines  of  their 
religion.  It  is,  on  the  contrary,  evident  that  the  greater  number 
of  missionaries  or  clergymen  a  nation  maintains,  the  less  it  has  to 
expend  on  other  things  ;  while  the  more  it  expends  judiciously  in  keep- 
ing agriculturists  and  manufacturers  at  work,  the  more  it  will  have 
for  every  other  purpose.  By  the  former,  it  diminishes,  cceteris  paribus, 
its  stock  of  material  products ;  by  the  latter  it  increases  them. 

Both  these  eminent  writers  seem  to  look  upon  the  production 
of  vendible  commodities,  either  directly  or  indirectly,  as  the 
end  of  economic  activity.  From  that  point  of  view  even  cheap 
and  tawdry  articles  which  are  of  no  use  to  anyone,  as  a  puritan- 
ical moralist  would  say,  are  nevertheless  wealth,  and  the  labor 
which  produces  them  is  productive  labor.  On  the  other  hand, 
the  philosopher  who  elevates  our  thoughts  above  the  plane 
where  such  things  are  enjoyed  would  be  an  unproductive  la- 
borer, and  yet  this  philosopher  might  be  doing  infinitely  more 
for  the  ultimate  prosperity  and  greatness  of  the  nation  than  the 
manufacturer  of  such  articles. 


330  PRINCIPLES  OF  NATIONAL  ECONOMY 

There  is,  however,  something  finely  democratic  in  the  attitude 
of  these  writers.  It  assumes  that  whatever  the  people  want,  as 
expressed  either  by  their  votes  or  by  their  purchases,  they  are 
entitled  to  have  and  that  no  one,  not  even  the  philosopher, 
should  set  himself  up  as  a  moral  censor.  Their  judgment,  as 
expressed  through  their  purchases  of  vendible  commodities,  is 
the  final  word  in  such  matters.  Only  such  labor  as  supplies, 
either  directly  or  indirectly,  things  which  the  people  are  willing 
to  purchase  is  to  be  regarded  as  productive  according  to  their 
point  of  view. 

Distinction  similar  to  that  between  producers'  and  consumers' 
goods.  Another  and  more  satisfactory  way  of  looking  at  this 
distinction  between  productive  and  unproductive  labor  is  to 
compare  it  with  the  distinction  between  producers'  and  con- 
sumers' goods.  It  would  not  occur  to  anyone  that  a  writer  was 
disparaging  bread  if  he  were  to  say  that  it  is  a  consumers'  good 
and  not  a  producers'  good.  To  say  that  a  sewing  machine  is  a 
producers'  good,  while  a  coat  is  a  consumers'  good,  is  not  neces- 
sarily to  place  the  machine  in  a  superior  class  and  the  coat  in 
an  inferior  class.  And  yet  to  say  that  a  coat  is  a  consumers' 
good  may  mean  very  much  the  same  as  to  say  that  it  is  an  un- 
productive good.  In  the  above  passage  Mill  distinctly  states 
that  unproductive  labor  is  not  necessarily  useless  labor. 

Much  of  that  which  these  writers  include  under  unproductive 
labor  may,  however,  be  productive  even  in  the  technical  sense 
in  which  they  use  that  word.  A  menial  servant,  for  example, 
who  saves  the  time  of  his  employer  and  enables  him  to  devote 
his  energies  exclusively  to  highly  productive  work  really  con- 
tributes to  the  production  of  vendible  commodities,  even  though 
he  himself  has  no  direct  connection  with  any  such  article ;  but 
if  a  menial  servant  or  anyone  else  merely  helps  a  man  of  lei- 
sure to  while  away  his  idle  hours  by  furnishing  amusement 
or  entertainment,  his  work  can  scarcely  be  called  productive 
in  any  sense. 

Wherein  labor  contributes  to  national  prosperity  and  wherein 
it  does  not.  After  all,  the  important  distinction  is  not  between 


PERSONAL  AND  PROFESSIONAL  SERVICES         331 

the  labor  which  produces  vendible  commodities  and  that  which 
does  not.  The  distinction  of  real  importance  is  that  between 
labor  which  contributes  to  the  well-being,  prosperity,  and 
greatness  of  the  nation  and  that  which  does  not.  Labor  may 
produce  a  commodity  which  sells  for  a  high  price  on  the  market, 
—which  satisfies  an  intense  desire  which  people  will  pay  a  high 
price  to  have  gratified ;  and  yet,  if  the  desire  is  a  vicious  one, 
if  its  gratification  weakens  in  mind  or  body  those  who  buy  the 
commodity,  or  if  it  merely  incapacitates  them  temporarily  for 
useful  work,  that  labor  would  have  to  be  classed  as  unproduc- 
tive. On  the  other  hand,  the  labor  of  the  musician,  the  poet,  or 
the  preacher,  if  it  does  not  tend  to  produce  softness  but  inspires 
to  strenuousness  and  productivity,  if  it  rationalizes  the  con- 
sumption of  wealth,  if  it  makes  people  desire  the  right  things, 
would  have  to  be  classified  as  highly  productive.  To  be  sure,  a 
book,  a  poem,  or  a  picture  is  a  vendible  commodity,  and  its 
producer  would  be  called  a  productive  laborer,  under  the  classic 
definition.  If  one  wanted  to  insist  upon  it  one  might  go  so  far 
as  to  say  that  the  sound  waves  produced  by  the  musician  or 
the  talker  are  also  material  things  and  vendible,  but  it  is  not 
necessary  to  go  so  far  as  that. 

This  distinction  not  so  clear  as  the  other.  One  disadvantage 
in  the  position  which  we  are  taking — in  favor  of  the  view  that 
the  important  distinction  is  that  between  labor  which  adds  to  the 
well-being  of  the  nation  and  labor  which  does  not — is  that  it 
leaves  a  great  deal  to  the  opinion  of  the  student.  Whether  labor 
produces  a  vendible  commodity  or  not  is  generally  a  question 
of  ascertainable  fact.  Whether  it  is  good  for  the  nation  or  not 
is  sometimes  a  matter  of  opinion.  There  could  scarcely  be  any 
denial,  for  example,  that  a  distillery  produced  a  vendible  com- 
modity, but  there  has  been  a  great  deal  of  difference  of  opinion 
as  to  whether  it  was  a  benefit  or  an  injury  to  the  nation.  On  the 
other  hand,  it  could  scarcely  be  claimed  that  a  moral  leader  who 
persuaded  people  to  become  total  abstainers  was  producing  vend- 
ible commodities,  but  there  are  those  who  hold  to  the  opinion 
that  he  is  contributing  to  the  general  well-being  of  the  nation. 


332  PRINCIPLES  OF  NATIONAL  ECONOMY 

Granting  the  advantage,  from  the  standpoint  of  clearness,  of 
the  classical  distinction  between  productive  and  unproductive 
labor,  the  present  writer  nevertheless  contends  that  the  dis- 
tinction between  that  labor  which  is  beneficial  and  that  which 
is  not  is  much  more  important.  Probably  as  large  a  proportion 
of  the  labor  which  is  engaged  in  producing  material  commodi- 
ties for  the  market  is  wasted  as  of  the  labor  which  is  not  so 
engaged.  Probably  as  large  a  proportion  of  that  labor  which  is 
not  engaged  in  producing  material  commodities  is  advantageous 
to  the  nation  as  of  that  which  is  so  engaged.  The  prosperity 
and  well-being  of  the  nation  will  depend  upon  the  proportion 
of  the  people  who  are  doing  useful  work  rather  than  upon  the 
proportion  that  are  producing  material  commodities. 

All  labor  which  is  not  engaged  in  the  production  or  handling 
of  material  commodities  which  are  bought  and  sold  on  the 
market  is  grouped,  not  only  in  this  chapter  but  in  various 
census  reports  and  other  public  documents,  as  professional 
and  personal  service.  Professional  service  is  limited  to  a  few 
learned  or  highly  skilled  occupations,  such  as  law,  medicine, 
theology,  teaching,  governing,  acting,  etc.  Personal  service  in- 
cludes such  a  multitude  of  occupations  as  would  fill  a  small 
catalogue.  Barbers,  bootblacks,  valets,  domestic  servants,  and 
all  others  who  render  their  service  directly,  rather  than  indi- 
rectly through  the  medium  of  a  material  product,  may  be  said 
to  render  personal  service.  If  it  is  genuine  service,  whether  it 
is  professional  or  personal,  it  is  a  factor  in  the  prosperity, 
power,  and  greatness  of  the  nation. 

COLLATERAL  READING 

CARVER,  THOMAS  NIXON.    Principles  of  Rural  Economics.   Boston,  1911. 
HANEY,  LEWIS  H.  Business  Organization  and  Combination.    New  York, 
1914. 

JOHNSON,  EMERY  R.    American  Railway  Transportation.    New  York,  1910. 
SMITH,  ADAM.    The  Wealth  of  Nations,  Book  III.    Oxford,  1880. 


PART  IV.    EXCHANGE 


CHAPTER  XXIV 
WHAT  IS  VALUE? 

Exchange  a  part  of  the  division  of  labor.  In  the  chapter  on 
The  Division  of  Labor  it  was  pointed  out  that  there  is  a  great 
advantage  to  be  gained  from  specialization.  When  the  whole 
industrial  society  is  so  organized  that  each  person  can  do  that 
for  which  he  is  best  fitted  by  nature,  training,  inclination,  and 
location,  the  general  quality  of  the  work  is  better  than  it  would 
be  if  everyone  had  to  learn  a  great  many  things.  It  was  also 
pointed  out  that  the  division  of  labor  necessitates  the  exchange 
of  products  and  services.  In  the  economics  of  the  private  family 
the  subject  of  exchange  is  so  unimportant  as  to  be  ignored  al- 
together. Within  the  family  a  sort  of  primitive  communism 
exists,  so  that  even  though  there  may  be  a  division  of  labor 
among  the  members,  there  is  practically  no  trading  or  bartering 
among  them.  In  the  larger  industrial  society,  however,  unless 
it  is  organized  also  on  a  communistic  basis,  there  is  a  great  deal 
of  trading,  bartering,  and  exchanging.  Therefore  exchange  has 
come  to  be  one  of  the  most  important  departments  of  the  sub- 
ject of  public  economics  or  political  economy.  Our  whole  sys- 
tem of  trading,  transporting,  and  merchandising  is  a  necessary 
part  of  an  industrial  system  which  is  characterized  by  the 
division  and  specialization  of  labor. 

Valuation  a  part  of  exchange.  An  important  part  of  this  in- 
tricate system  of  exchange  is  the  process  of  evaluating  goods 
and  services.  It  would  be  difficult  to  do  very  much  exchanging 
without  beginning  to  think  in  terms  of  value.  In  fact,  even  in 
the  simplest  case  of  barter,  as  when  boys  swap  marbles,  each 
barterer  in  his  mind  compares  the  desirability  of  the  objects 
that  are  to  be  exchanged.  To  compare  the  desirability  of  the 

335 


336  PRINCIPLES  OF  NATIONAL  ECONOMY 

objects  is  to  think  in  terms  of  value.  In  its  original  and  individ- 
ual sense  the  value  of  a  thing  was  the  esteem  in  which  it  was 
held ;  in  a  somewhat  more  highly  developed,  or  social,  sense 
the  value  of  a  thing  was  the  esteem  in  which  it  was  held  by  all 
those  who  were  interested  in  it.  When  men  in  considerable 
numbers  were  evaluating  and  comparing  the  same  group  of 
commodities  and  exchanging  them  a  market  was  said  to  exist. 
Where  a  market  existed  for  an  object  its  value  was  the  esteem 
shown  for  it  on  the  market.  The  sign,  or  symptom,  of  that 
esteem  is  the  fact  that  men  were  making  sacrifices  in  order  to 
get  the  object;  that  is,  they  were  either  laboring  to  get  it  or 
they  were  giving  up  other  desirable  things  in  exchange  for  it. 

Value  in  exchange.  This  willingness  to  give  something — 
either  labor  or  another  desirable  object — in  exchange  for  a 
thing  has  finally  come  to  be  regarded  by  most  writers  as  the 
value  of  the  thing,  instead  of  being,  as  originally,  regarded 
merely  as  the  sign,  or  symptom,  of  the  esteem  in  which  it  was 
held.  A  brief  but  satisfactory  definition  of  market  value,  or  of 
value  as  it  is  understood  on  the  market  and  in  commercial 
circles,  is  "  power  in  exchange."  Under  this  definition  the  value 
of  an  article  is  the  power  which  it  confers  upon  its  owner  to 
command  other  desirable  things  in  peaceful  and  voluntary  ex- 
change. There  has  come,  therefore,  a  change  in  the  popular 
meaning  of  the  word  u  value."  In  modern  usage  the  esteem  in 
which  the  object  is  held  or  the  desire  which  is  felt  for  it  is  that 
which  gives  it  value  instead  of  being  the  value  itself. 

When  value  is  defined  as  "  power  in  exchange,"  it  must  not  be 
confused  with  a  mere  ratio  of  exchange.  A  thing  which  confers 
upon  its  owner  the  power  to  command  other  things  in  peace- 
ful and  voluntary  exchange  has  power  or  influence  over  the 
minds  of  men  ;  it  influences  their  choice  and  induces  them  to  do 
things  which  they  would  not  otherwise  do.  It  may,  in  a  physi- 
cal sense,  cause  goods  to  move  from  one  possessor  to  another. 
Within  certain  limits  it  exercises  control,  or  at  least  influence, 
over  motives.  Of  course,  when  things  exchange  against  one 
another  it  must  always  happen  that  they  exchange  in  certain 


WHAT  IS  VALUE?  337 

ratios,  but  the  ratio  is  merely  incidental  and  is  not  the  essential 
characteristic  of  value.  The  weights  of  any  two  objects  must 
bear  some  ratio  to  each  other,  but  it  would  be  a  mistake  to  say 
that  weight  was  in  itself  a  mere  ratio.  It  is  equally  wrong  to 
say  that  value  is  a  mere  ratio. 

To  value  is  to  esteem.  The  purchasing  power,  or  value  in 
exchange,  of  a  specific  object  is  not  always  proportional  to  the 
esteem  which  is  felt  for  it  or  to  the  intensity  of  the  desire  for  it. 
Among  wanderers  on  a  desert  a  small  portion  of  water  would 
be  exceedingly  precious,  but  if  none  of  them  had  anything  to 
give  in  exchange  for  it,  it  would  not  have  much  purchasing 
power  or  market  value ;  that  is,  its  owner  would  not  realize 
very  much  from  its  sale.  It  would,  however,  be  held  in  the  very 
highest  esteem ;  it  would  be  intensely  desired ;  it  would  have 
great  power  over  human  motives ;  men  would  go  to  any  length 
to  get  it ;  and  if  they  chanced  to  have  many  things  to  give  in 
exchange  for  it,  it  would  have  great  power  in  exchange.  The 
situation  of  some  thirsty  men  on  a  desert  with  nothing  to  give 
in  exchange  for  water  is,  however,  very  unusual.  In  the  or- 
dinary market  place  men  have  something  to  give  for  whatever 
they  desire  most.  The  thing  which  is  intensely  desired,  es- 
teemed, or  appreciated  will,  under  such  circumstances,  always 
command  many  other  desirable  objects  in  peaceful  and  volun- 
tary exchange.  The  tendency  of  later  writers  is  to  do  away 
with  the  distinction  between  value  in  use  and  value  in  exchange. 
Value  in  use  is  nothing  except  utility,  whereas  value  in  exchange 
is  simply  value.  There  is,  however,  a  very  close  connection 
between  utility  and  value.  Utility  is  sometimes  defined  as  the 
power  to  satisfy  a  want  or  gratify  a  desire  (in  which  case  it  is 
synonymous  with  desirability),  but  value  is  the  power  to  com- 
mand other  desirable  things  in  peaceful  and  voluntary  ex- 
change. Value  depends  upon  desirability,  since  nothing  could 
have  value  unless  it  had  the  power  to  satisfy  a  desire  of  some 
kind.  In  other  words,  nobody  would  give  anything  in  peace- 
ful and  voluntary  exchange  for  the  article  in  question  unless 
he  desired  it.  On  the  other  hand,  however  intensely  he  might 


338  PRINCIPLES  OF  NATIONAL  ECONOMY 

desire  it,  if  he  had  nothing  to  give  in  exchange  for  it,  and  every- 
one else  were  in  the  same  condition,  it  would  not  have  much 
power  in  exchange.  The  water  in  the  foregoing  illustration 
would  have  great  utility  and  desirability  but  no  great  value, — 
certainly  no  great  market  value. 

Censorious  criticisms  upon  market  value.  There  is,  however, 
still  another  sense  in  which  both  "value"  and  "utility"  are 
sometimes  used.  One  who  has  strong  ideas  on  the  subject  will 
sometimes  assert  that  a  given  commodity  is  "  really  worth  "  very 
little,  even  though  everybody  seems  to  desire  it  and  to  be  pay- 
ing a  high  price  for  it,  or  that  it  is  "really  worth"  a  great  deal, 
even  though  no  one  else  seems  to  esteem  it  or  to  be  willing  to 
pay  much  for  it.  In  this  case  the  speaker  is  passing  judgment 
upon  the  desires  of  the  people.  His  judgment  may  be  sound 
and  that  of  the  multitude  unsound,  or  vice  versa.  There  are, 
however,  always  those  who  have  ideas  on  the  subject  of  "real" 
value  or  utility  as  opposed  to  the  popular  idea  of  value  or 
utility.  Their  idea  of  "real"  utility  is  the  power  to  satisfy  a 
commendable  desire,  whereas  economic  writers  have  generally, 
though  not  universally,  denned  utility  as  the  power  to  satisfy 
any  sort  of  desire.  There  could  be  no  possible  objection  to 
defining  desirability  in  that  way. 

Distinction  between  value  and  price.  Value  should  also  be 
distinguished  from  price.  The  price  of  an  article,  as  has  been 
explained  many  times  by  economists,  is  merely  its  value  ex- 
pressed in  terms  of  some  single  commodity  which  the  com- 
munity has  generally  agreed  upon  as  the  measure  of  value  and 
the  medium  of  exchange.  This  commodity  is  usually  money. 
Whenever  the  word  "price"  is  used  nowadays,  if  it  is  used 
properly,  it  .means  value  expressed  in  money,  or  the  amount  of 
money  which  will  be  given  in  exchange  for  a  certain  article. 
Wherever  the  word  "value"  is  used,  at  least  in  connection  with 
the  general  conditions  of  the  market,  it  means  its  general  power 
in  exchange  against  other  articles,  of  which  money  is  only  one. 
The  cheapening  of  money  tends  to  create  a  general  rise  in 
prices  but  not  a  general  rise  in  values. 


WHAT  IS  VALUE?  339 

To  summarize,  the  economic  value  of  an  object  is  variously 
defined  as 

1.  Its  price ;  that  is,  the  amount  of  money  for  which  it  sells  (wrong) 

2.  Its  utility  (inaccurate),  which  may  mean  either 

a.  Its  power  to  satisfy  any  desire,  or 

b.  Its  power  to  satisfy  a  commendable  desire 

3.  Its  power  to  increase  well-being  (inaccurate)  of 

a.  An  individual,  or 

b.  The  nation  • 

4.  Its  power  over  human  motives  (correct) : 

a.  Causing  men  to  exert  themselves  in  order  to  get  it,  and 

b.  Causing  men  to  give  other  desirable  things  in  exchange  for  it, 

because  of 

(1)  The  intensity  of  their  desire  for  it,  and 

(2)  The  abundance  of  other  desirable  things  in  their  pos- 
session 

Value  is  power  in  exchange.  Since  we  are  here  concerned 
with  the  general  problem  of  exchange  and  market  value  in  the 
civilization  of  which  we  are  a  part  and  under  the  conditions  in 
which  we  have  to  make  our  living,  the  last  of  these  four  defini- 
tions will  be  used  in  this  chapter.  In  this  sense  value  is 
"power,"  it  causes  bodies  to  move;  that  is,  it  causes  men  to 
exert  themselves  and  causes  things  to  move  from  one  owner  to 
another.  It  is,  however,  power  over  human  motives  and  not 
mechanical  power.  We  may  therefore  accept  "power  in  ex- 
change" as  a  good  working  definition  of  market  value,  or  value 
as  it  is  used  on  the  market  and  in  our  general  system  of  ex- 
change. Under  this  definition  several  questions  will  at  once 
arise.  One  of  these  is,  Why  do  some  things  possess  this  power  • 
and  others  not  ?  Another  is,  Why  do  some  things  possess  more 
of  it  than  others  ?  Or,  again,  Why  does  the  same  thing  possess 
more  of  it  at  one  time  or  place  than  at  another  ? 

Value  attaches  to  concrete  things.  Not  much  headway  can 
be  made  in  answering  any  of  these  questions  until  we  clear  the 
way  by  certain  necessary  explanations.  Some  of  these  explana- 
tions can  be  understood  only  after  some  very  hard  and  clear 
thinking.  In  the  first  place,  we  must  distinguish  between 


340  PRINCIPLES  OF  NATIONAL  ECONOMY 

things  in  general  and  concrete  units.  It  is  one  thing  to  speak 
of  the  value  of  bread  in  general ;  it  is  another  thing  to  speak  of 
the  value  of  a  loaf  of  bread.  It  is  one  thing  to  speak  of  the 
value,  or  the  lack  of  value,  of  air  in  general,  and  another  thing 
to  speak  of  the  value,  or  lack  of  value,  of  a  given  cubic  yard 
of  air.  If  one  will  look  around  and  see  what  is  going  on,  one 
will  notice  that  men  are  not  exchanging  things  in  general, 
but  only  concrete  units  or  quantities  of  things ;  not  wheat  in 
general,  but  a  given  number  of  bushels  of  wheat  of  a  given 
grade ;  not  money  in  general,  but  a  given  number  of  dollars, 
francs,  or  pounds ;  and  even  if  air  or  water  were  exchanged,  it 
would  not  be  air  or  water  in  general,  but  some  cubic  yards  or 
gallons  in  definite  numbers. 

This  distinction  between  things  in  general  and  concrete  units 
or  quantities  will  eliminate  forever  the  confusion  that  some- 
times results  when  that  distinction  is  not  made.  For  example, 
we  are  sometimes  told  that  air  is  of  immeasurable  utility,  and 
yet  it  has  no  power  in  exchange.  If  a  man  will  think,  however, 
not  of  air  in  general  but  of  a  definite  cubic  yard  of  air  which 
may  be  boxed  up  (it  might  even  be  offered  for  sale),  and  then 
if  he  will  ask  himself  how  much  he  cares  for  that  particular 
cubic  yard  of  air  or  how  much  use  it  is  to  him,  he  will  find  that 
he  does  not  care  for  it  at  all  or  that  it  is  of  no  use  to  him  what- 
ever. If  it  were  of  any  use  to  him  (that  is,  if  he  would  be  any 
better  off  with  it  than  without  it)  he  would  be  willing  to  give 
something  in  exchange  for  it ;  it  would  then  possess  value,  or 
power  in  exchange. 

Total  utility  and  final,  or  marginal,  utility.  In  other  words, 
there  are  two  distinct  ideas  of  utility :  one  is  total  utility,  and 
the  other  is  sometimes  called  specific,  sometimes  final,  and 
sometimes  marginal  utility.  We  gain  an  impression  of  the  total 
utility  of  air  when  we  think  what  would  happen  to  us  if  all  the 
air  in  existence  were  suddenly  annihilated  or  if  we,  individually, 
were  shut  off  from  access  to  air.  From  this  point  of  view  the 
total  utility  of  air  is  incalculable.  But  if  we  were  to  consider 


WHAT  IS  VALUE?  341 

what  would  happen  if  a  definite  cubic  yard  were  annihilated  or 
if  we  were  shut  off  from  access  to  it,  we  get  a  very  different 
impression.  As  a  matter  of  fact,  it  would  make  no  difference 
to  anybody,  because  there  would  be  enough  left  to  satisfy 
completely  every  desire  for  air. 

In  this  world  of  adjustment,  improvement,  and  progress,  or 
of  maladjustment  and  retrogression,  the  problem  of  having 
more  or  of  having  less  of  various  things  is  always  the  important 
problem.  How  desirable  is  it  that  there  should  be  more  air 
than  there  is,  or  how  undesirable  is  it  that  there  should  be  less 
air  than  there  is?  Apparently  this  is  a  matter  of  indifference 
when  one  is  out  of  doors.  In  certain  close  rooms  it  becomes 
a  matter  of  importance,  and  air  has  some  value  in  these  cases. 
It  is  for  this  reason  that  in  a  practical,  workaday  world,  where 
we  are  trying  to  improve  our  condition  or  to  prevent  it  from 
becoming  worse,  we  place  a  value  on  only  those  things  which 
we  desire  to  see  increased.  No  social  utility  would  be  promoted 
by  increasing  the  supply  of  air  in  any  outdoor  situation  or  by 
offering  a  price  for  increasing  it.  There  is,  therefore,  no  social 
or  individual  reason  why  it  should  possess  any  value  or  any 
power  in  exchange.  On  the  other  hand,  if  you  think  of  an 
article  of  which  you  can  say  that  you  would  be  better  off  if  you 
had  a  little  more  of  it,  or  worse  off  if  you  had  a  little  less  than 
you  have,  you  have  a  perfectly  good  individual  reason  for  in- 
creasing your  possession.  Or  if  the  community  can  say  that  it 
would  be  better  off  if  it  had  more  of  it,  or  worse  off  if  it  had 
less,  then  the  community  would  have  a  perfectly  good  reason 
for  desiring  to  increase  the  supply.  This  is  the  case  with  every- 
thing which  has  value. 

The  functional  theory  of  value.  A  moral  philosopher  might 
conclude  otherwise ;  that  is,  he  might  think  that  the  desires  of 
the  people  were  vicious  and  that  they  would  be  worse  off  if  they 
had  more  of  a  certain  article,  whereas  they  themselves  think 
they  would  be  better  off  if  they  had  more  of  it.  It  is  the  desires 
of  the  multitude  rather  than  the  conclusions  of  the  moral 


342  PRINCIPLES  OF  NATIONAL  ECONOMY 

philosopher  which  determine  market  value.  This  may  be  called 
a  functional  theory  of  value.  The  function  of  value  in  a  society 
is  to  induce  producers  to  produce.  It  is  a  symptom  that  more 
of  the  article  possessing  value  is  wanted.  It  is,  at  the  same 
time,  a  means  of  getting  more ;  that  is,  if  people  will  offer 
desirable  things  in  exchange  for  an  object  someone  may  be 
persuaded  to  produce  it. 


CHAPTER  XXV 

WHAT  DETERMINES  THE  VALUE  OF  A  THING 

Commodities  and  specific  units  thereof.  We  saw  in  the  last 
chapter  that  a  definite,  concrete  thing,  such  as  a  loaf  of  bread 
or  an  egg,  has  value  only  because  someone  desires  it,  and  that 
a  general  commodity,  such  as  bread  or  eggs,  has  value  only 
because  someone  desires  more  of  it  than  he  possesses.  We  saw 
also  that  in  either  case  the  more  intense  the  desire  for  the  thing 
or  the  commodity,  the  more  value  it  will  have,  provided  those 
who  desire  it  have  something  to  give  in  exchange  for  it  or  are 
able  to  exert  themselves  in  the  way  of  getting  it. 

The  next  question  is,  What  determines  how  intensely  a 
concrete  thing  is  desired  or  how  intensely  the  people  desire 
more  of  a  commodity  than  they  possess?  It  is  obvious  that 
something  depends  upon  how  much  of  the  commodity  they 
already  possess.  If  everyone  not  only  has  quite  enough  for 
the  present  but  foresees  no  scarcity  in  the  future,  it  is  obvious 
that  he  will  have  no  desire  for  more  of  the  commodity,  nor 
would  he  have  any  desire  for  any  concrete  unit  of  it  that  you 
might  offer  him.  If  everyone  is  in  that  situation,  no  one  will 
give  anything  in  exchange  for  it.  If,  however,  everyone  has 
almost  enough  or  thinks  that  he  will  always  have  almost  enough 
of  the  commodity  in  question,  his  desire  for  more  will  not  be  very 
intense,  nor  will  he  give  very  much  in  exchange  for  it.  But  if 
he  lacks  a  great  deal  of  having  enough  or  thinks  that  he  is  likely 
to  lack  it,  he  will  give  a  great  deal  to  get  a  little  more.  In  this 
case  each  unit  of  the  commodity  will  have  high  value.  In  short, 
the  abundance  or  scarcity  of  a  commodity  has  a  great  deal  to  do 
in  determining  the  intensity  with  which  each  unit  of  it  is 
desired  and  with  its  power  in  exchange. 

343 


344  PRINCIPLES  OF  NATIONAL  ECONOMY 

Demand  and  supply.  The  foregoing  remarks  are  only  an- 
other way  of  saying  that  the  value  of  a  commodity  is  deter- 
mined by  the  demand  for  it  and  the  supply  of  it.  This  is  well 
known  as  the  law  of  demand  and  supply.  This  law,  however, 
is  not  a  mere  convention  of  the  market ;  it  is  based  upon  certain 
physical  and  physiological  facts,  which  are  as  true  under  one 
system  of  society  as  under  another. 

First,  let  us  understand  how  it  works  on  an  ordinary  market ; 
that  is,  where  a  number  of  buyers  desire  to  buy,  and  different 
sellers  desire  to  sell,  varying  quantities  of  the  same  commodity. 
Not  all  the  buyers  are  equally  anxious  to  buy,  nor  do  they  all 
have  equal  quantities  of  other  goods  to  give  in  exchange. 
Therefore  they  will  not  all  be  willing  to  pay  the  same  price  for 
equal  quantities  of  the  commodity  in  question.  Let  us  assume, 
for  the  sake  of  an  illustration,  that  there  are  eleven  possible 
buyers  ready  to  buy  at  as  many  different  prices.  One  is  willing 
to  pay,  let  us  say,  as  high  as  a  dollar  for  a  pound  of  the  commod- 
ity if  he  cannot  get  it  more  cheaply.  Another  is  willing  to  pay 
ninety-five  cents,  another  ninety,  another  eighty-five,  and  so  on, 
the  eleventh  not  being  willing  to  pay  more  than  fifty  cents. 
The  prices  at  which  these  buyers  are  willing  to  buy  are  listed  in 
the  following  table,  under  what  is  called  the  "demand  schedule." 

DEMAND  SCHEDULE  SUPPLY  SCHEDULE 

ist  buyer  would  pay  $1.00  $0.50  is  ist  seller's  lowest  price 

2d  buyer  would  pay  $0.95  $0.55  is  2d  seller's  lowest  price 

3d  buyer  would  pay  $0.90  $0.60  is  3d  seller's  lowest  price 

4th  buyer  would  pay  $0.85  $0.65  is  4th  seller's  lowest  price 

5th  buyer  would  pay  $0.80  $0.70  is  5th  seller's  lowest  price 

6th  buyer  would  pay  $0.75  $0.75  is  6th  seller's  lowest  price 

7th  buyer  would  pay  $0.70  $0.80  is  7th  seller's  lowest  price 

8th  buyer  would  pay  $0.65  $0.85  is  8th  seller's  lowest  price 

9th  buyer  would  pay  $0.60  $0.90  is  gth  seller's  lowest  price 

loth  buyer  would  pay  $0.55  $0.95  is  loth  seller's  lowest  price 

i  ith  buyer  would  pay  $0.50  $1.00  is  I  ith  seller's  lowest  price 

In  order  to  simplify  our  illustration  let  us  assume  an  equaf 
number  of  sellers  on  the  market,  no  two  of  whom  are  equally 


WHAT  DETERMINES  VALUE  345 

anxious  to  sell.  The  different  prices  at  which  we  may  assume 
that  they  would  be  willing  to  sell  are  listed  above  under  what  is 
called  the  "supply  schedule." 

Under  certain  special  circumstances  which  would  be  hard  to 
reproduce,  eleven  units  of  the  commodity  might  conceivably  be 
transferred.  If  the  first  buyer,  not  knowing  that  he  could  do 
better,  should  meet  with  the  eleventh  seller  they  could  do  busi- 
ness ;  and  if  the  second  buyer  in  the  list,  under  the  same  condi- 
tions, should  meet  the  tenth  seller,  the  third  buyer  the  ninth 
seller,  and  so  on,  every  buyer  might  buy  and  every  seller  sell 
one  unit  of  the  commodity.  In  this  case,  however,  each  unit 
sold  would  sell  at  a  different  price. 

On  an  open  market,  however,  where  each  one  knew  what  the 
other  was  doing,  this  would  be  impossible.  There  is  a  general 
tendency  for  each  unit  of  the  same  grade  and  quality  to  sell  at 
the  same  price  at  the  same  time  and  place.  If  such  a  uni- 
form price  were  established  on  the  market  the  case  would  be 
very  different. 

If  the  reader  will  study  the  two  schedules  and  try  to  find 
a  uniform  price  that  will  permit  the  largest  number  of  sales  to 
be  made,  he  will  find  that  the  maximum  number  is  six.  If  the 
price  is  fixed  at  one  dollar  it  is  obvious  that  only  one  sale  can 
be  made,  for,  though  eleven  sellers  would  sell  at  that  price,  only 
one  buyer  would  buy.  If  the  price  were  fixed  at  ninety-five 
cents  two  sales  could  be  made.  There  would  be  ten  sellers,  but 
only  two  buyers.  At  seventy-five  cents,  however,  there  would 
be  six  sellers  and  six  buyers.  At  seventy  cents  there  would  be 
seven  buyers,  but  only  five  sellers.  In  short,  seventy-five  cents 
would  be  the  price  at  which  the  maximum  business  could  be 
done.  If  the  price  fixer  desired  to  facilitate  business  and  make 
the  most  of  the  situation,  that  would  be  the  best  he  could  do. 

In  assuming  a  uniform  price  for  all  units  of  the  commodity 
that  are  sold  we  are  not  departing  very  far  from  actual  practices. 

The  first  law  of  the  market.  The  first  law  of  the  market  is 
that  things  of  the  same  kind  and  quality  tend  to  have  the  same 
value  at  the  same  time  and  place.  That  is  to  say,  at  any  given 


346  PRINCIPLES  OF  NATIONAL  ECONOMY 

time  and  place,  if  there  are  a  large  number  of  units,  all  exactly 
alike  and  equally  desirable,  they  will  all  tend  to  sell  at  the 
same  price  and  have  the  same  power  in  exchange.  If  they  are 
unlike,  some  of  them  being  more  desirable  than  others,  of  course 
some  will  have  more  power  in  exchange  than  the  others.  Again, 
the  values  may,  on  a  feverish  market,  change  from  minute  to 
minute ;  that  is,  so  rapidly  as  to  create  the  illusion  of  selling  at 
different  prices  at  the  same  time.  Or,  again,  in  different  por- 
tions of  the  same  market  similar  things  sometimes  sell  at 
different  prices.  The  tendency,  however,  is  toward  a  uniform 
price  at  the  same  time  and  place.  Where  a  commodity  has  be- 
come standardized  so  that  there  are  many  units  that  are  equally 
desirable,  it  has  become  customary  to  buy  the  article  by  quan- 
tity without  taking  the  trouble  to  pick  out  the  specific  units 
desired.  Wheat,  coal,  cotton,  pig  iron,  and  many  other  com- 
modities are  so  graded  and  standardized  as  to  sell  in  this  way. 
On  the  other  hand,  there  are  a  great  many  commodities  that  are 
not  easily  standardized.  In  these  cases  the  purchaser  will 
usually  insist  on  picking  out  the  individual  units  which  he 
desires.  Race  horses,  dwelling-houses,  farms,  building-lots,  and 
a  multitude  of  other  things  will  probably  always  have  to  be 
bought  and  sold  in  this  way. 

Two  reasons  why  a  thing  may  not  be  wanted.  If  we  agree 
that  a  thing  will  not  have  any  value  unless  someone  happens  to 
desire  it  the  next  question  is,  Why  are  some  things  desired  and 
others  not?  And  why  are  some  desired  more  than  others? 
There  are  two  primary  reasons  why  an  article  may  not  be 
desired  at  all.  In  the  first  place,  it  may  possess  no  total  util- 
ity ;  that  is,  there  may  be  no  use  to  which  it  can  be  put,  so  far 
as  anyone  knows.  There  are  not,  however,  very  many  such 
things.  The  other  reason  is  that  there  are  so  many  other  things 
just  like  the  one  in  question  as  to  more  than  satisfy  the  desire. 
\Vhere  water  is  very  scarce  the  desire  for  it  becomes  intense ; 
where  it  is  abundant  the  desire  is  completely  satiated,  so  that  if 
a  specific  barrel  or  gallon  of  water  were  offered  for  sale,  no  one 
would  desire  it  at  all.  In  such  a  situation  water  would  have  as 


WHAT  DETERMINES  VALUE  347 

little  value  as  though  there  were  no  possible  use  to  which  it 
could  be  put. 

One  might  go  even  farther  and  name  articles  which,  though 
capable  of  satisfying  desires  or  of  being  put  to  important  uses, 
have  yet  become  worse  than  worthless ;  that  is,  have  become 
nuisances  through  their  overabundance.  Many  of  the  weeds 
which  infest  our  fields  belong  in  this  class.  Water  in  a  swampy 
region  also  comes  to  possess  a  negative  value  (that  is,  men  will 
go  to  considerable  expense  to  get  rid  of  a  part  of  it),  and  yet  it 
may  be  perfectly  good  water,  capable  of  contributing  not  only 
to  human  life  but  to  plant  and  animal  life  as  well.  Rabbits 
in  Australia  and  English  sparrows  in  America  will  serve  as 
further  illustrations. 

A  commodity  has  value  only  when  there  is  not  enough  of  it. 
We  therefore  reach  the  general  conclusion  that  an  article  (that 
is,  a  definite  object,  such  as  may  be  bought  and  sold)  has  value 
only  when  it  is  wanted,  and  that  it  is  wanted  only  when  there 
are  not  enough  objects  like  it  to  satisfy  the  desire  for  it.  If 
there  are  so  many  others  like  it  that  the  desire  is  completely 
satiated  the  object  in  question  will  not  be  wanted  at  all,  and 
that  holds  true  of  each  and  every  one  considered  singly.  But 
if  there  are  not  enough  to  go  round  and  satisfy  everybody,  each 
and  every  such  object  will  be  desired  and  will  consequently 
have  a  value. 

Following  the  same  line  of  reasoning,  we  may  reach  the 
further  conclusion  that  an  object  has  much  value  when  it  is 
much  desired ;  it  has  little  value  when  it  is  not  much  desired. 
Its  power  in  exchange  as  compared  with  other  things  will  depend 
on  how  intensely  it  is  desired  in  comparison  with  other  things. 

Physiological  basis  of  the  law  of  demand  and  supply.  The 
great  law  of  supply  and  demand  is  thus  seen  to  have  a  physio- 
logical and  psychological  basis.  The  expression  "supply  and 
demand"  is  merely  a  formula  ;  back  of  this  formula  there  is  the 
physiological  fact  pointed  out  in  Chapter  II.  Every  desire  is 
satiable,  and  the  more  nearly  the  desire  approaches  the  state  of 
complete  satiation,  the  less  intense  it  becomes.  Thus  the  reason 


348  PRINCIPLES  OF  NATIONAL  ECONOMY 

that  any  superabundant  article  under  ordinary  circumstances 
has  no  value  is  because  it  is  so  abundant  that  every  desire  is 
completely  satiated.  That  is  the  reason  why  water  has  little 
or  no  value  in  a  well-watered  country.  Wherever  it  is  so  scarce 
that  the  desire  for  it  is  not  completely  satiated,  as  is  the  case 
in  an  arid  climate  where  people  are  trying  to  farm,  it  has  a 
value.  It  is  the  physiological  or  psychological  state  of  the  desire 
which  furnishes  the  real  basis  for  the  law  of  supply  and  de- 
mand. With  a  given  demand,  the  greater  the  supply  the  more 
nearly  all  desires  will  approach  the  point  of  satiation,  and  the 
more  indifferent  everyone's  attitude  toward  the  object  becomes  ; 
on  the  other  hand,  the  smaller  the  supply,  the  more  intense  the 
desire  for  each  unit  of  that  supply,  and  the  more  anxious  men 
are  to  get  it. 

As  there  are  two  reasons  mentioned  above  why  an  object 
may  not  be  desired  at  all,  there  are  also  two  similar  reasons 
why  the  desire  for  it  may  be  one  of  little  intensity.  In  the  first 
place,  the  possible  uses  to  which  the  object  may  be  put  may  be 
of  very  little  consequence  to  anybody ;  it  may  gratify  a  mere 
whim  or  caprice.  In  the  second  place,  the  supply  may  be  so 
great  that  the  desire  is  almost  completely  satisfied,  and  in  this 
case  no  one  will  care  very  much  about  getting  more  than  he  has, 
nor  will  anyone  give  very  much  to  get  more.  Under  either  set 
of  circumstances  no  one  gains  very  much  in  the  way  of  satisfac- 
tion or  well-being  if  some  producer  adds  to  the  supply ;  no  one 
loses  very  much  if  some  destroyer  subtracts  from  the  supply. 
This  may  seem  very  simple,  but  it  is  one  of  the  most  important 
considerations  in  the  whole  field  of  economics  ;  for  the  same  law 
of  value,  as  we  shall  see  when  we  take  up  the  study  of  distribu- 
tion, applies  to  the  labor  of  men  as  well  as  to  material  commod- 
ities. There  are  the  same  fundamental  principles  underlying 
the  law  of  supply  and  demand  in  one  case  as  in  the  other. 

The  relation  of  utility  to  value.  When  we  say  that  an  object 
has  value  only  when  it  is  wanted  we  are  virtually  saying  that  it 
has  value  only  when  it  has  utility,  for  utility  is  by  definition  the 
power  to  satisfy  a  want  or  a  desire.  Whether  that  want  be 


WHAT  DETERMINES  VALUE  349 

physiological  (like  hunger)  or  whimsical  (like  the  desire  for 
the  latest  novelty)  does  not  affect  the  case  in  the  ordinary 
economic  sense.  Economists  have  generally  refrained  from 
passing  moral  judgment  on  the  quality  of  desires,  though  there 
is  a  tendency  to  depart  from  this  tradition.  If  the  gratification 
of  a  vicious  desire  does  harm  in  the  long  run,  it  tends  to  destroy 
the  well-being  and  prosperity  of  the  community.  This  is  a 
consideration  of  great  economic  importance.  The  tendency, 
however,  in  a  democratic  society,  has  been  to  assume  that  what- 
ever the  people  happen  to  like,  it  is  their  affair  and  not  the 
affair  of  the  economist  or  the  moral  philosopher.  If  there  is  a 
popular  demand  for  a  cheap  and  tawdry  article  or  for  dema- 
gogical politics,  there  would  seem  to  be  equally  good  reasons  in 
either  case  for  saying  that  the  people  should  have  what  they 
like.  To  set  oneself  up  as  a  moral  censor,  to  pass  judgment  on 
the  desires  of  the  people  either  in  commercial  or  in  political 
affairs,  has  generally  been  considered  undemocratic.  Under  the 
impulse  of  this  rather  extreme  ideal  of  democracy,  utility  has 
been  defined,  as  stated  above,  as  the  power  to  satisfy  desires, 
whether  they  be  good,  bad,  or  indifferent.  Any  object,  there- 
fore, which  possesses  utility,  or  the  power  to  satisfy  a  desire, 
possesses  one  of  the  essential  factors  in  value. 

Meaning  of  scarcity.  When  we  say  that  an  article  has  value 
only  when  the  desire  for  it  is  left  unsatisfied  we  are  virtually 
saying  that  it  has  value  only  when  it  is  scarce.  Scarcity  is  by 
definition  insufficiency  to  satisfy  desires.  A  thing  may  be  rare 
without  being  scarce ;  that  is  to  say,  however  little  there  may 
be  of  a  certain  article,  if  that  little  is  more  than  sufficient  to 
satisfy  all  desires.,  the  article  can  hardly  be  said  to  be  scarce. 
Flies  in  the  winter  time  may  be  rare,  but  they  are  not  scarce 
in  the  technical  economic  sense,  since  even  then  there  are  more 
than  are  wanted.  Speaking  absolutely,  there  may  be  more 
grass  than  weeds  on  a  given  farm,  but,  relatively  to  the  farmer's 
desires,  grass  may  be  scarce  while  weeds  are  superabundant. 
If  we  assume  that  the  article  in  question  is  appropriable,  or 
capable  of  being  possessed  and  enjoyed,  and  not,  like  the  moon, 


350  PRINCIPLES  OF  NATIONAL  ECONOMY 

entirely  beyond  our  reach,  we  may  say  that  anything  which 
possesses  both  utility  and  scarcity  will  have  power  in  exchange, 
and  nothing  else  whatsoever  will  have  that  power. 

The  utility  of  an  article  is  the  basis  of  the  demand  for  it; 
the  scarcity  of  the  article  is  the  measurable  limit  of  its  supply. 
Every  boy  knows  that  the  first  apple  which  he  eats  at  any  one 
time  tastes  better  than  the  second,  provided  they  are  alike,  and 
the  second  better  than  the  third,  and  so  on.  He  knows  also  that, 
however  capacious  his  appetite,  if  the  supply  of  apples  holds 
out  he  will  ultimately  reach  a  point  where  he  doesn't  care  for 
any  more ;  in  other  words,  he  will  reach  the  point  of  complete 
satiation  so  far  as  apples  are  concerned.  When  this  point  is 
reached,  apples  have  lost  their  utility  for  him  and  he  becomes 
indifferent  to  them.  He  may  still  be  willing  to  give  something 
in  exchange  for  them  in  anticipation  of  tomorrow's  hunger, 
but  if  he  has  a  supply  sufficient  to  satisfy  not  only  present 
but  future  desires,  he  becomes  absolutely  indifferent  and  gives 
nothing  in  exchange  for  them. 

Social  value.  We  now  approach  a  secondary  phase  of  the  law 
of  value.  Even  though  a  boy's  own  desire  for  apples  may  be 
completely  satiated,  not  only  in  the  present  but  in  the  antici- 
pated future,  his  commercial  instinct  may  prompt  him  to  prize 
them,  not  because  he  himself  desires  to  consume  them  but  be- 
cause he  can  trade  them  to  someone  else  for  objects  which  he 
himself  desires.  At  this  stage  he  has  arrived  at  the  point  where 
he  begins  to  take  account  of  social  utility  as  well  as  of  individual 
utility.  If  he  perceives  that  there  is  in  society  around  him  an 
unsatisfied  desire  for  apples,  he  may  make  use  of  that  unsatis- 
fied desire  to  acquire  desirable  things  in  exchange  for  his  own 
surplus  apples.  This  power  (that  is,  power  in  exchange)  which 
commodities  possess  on  the  market  he  is  able  to  make  use  of 
to  his  own  advantage.  Thus  we  see  a  great  many  men  produc- 
ing articles  far  in  excess  of  their  own  needs  because  they  know 
that  these  articles  are  exchangeable  for  other  things  which  they 
need.  We  see  a  considerable  body  of  men  doing  nothing  except 
to  trade  in  objects  of  general  social  desire.  But  the  laws  which 


WHAT  DETERMINES  VALUE 


govern  social  valuation  are  fundamentally  the  same  as  those 
which  govern  individual  valuation.  There  must  be  somebody 
in  the  community  who  has  less  of  the  object  than  he  wants; 
otherwise  neither  the  producer  nor  the  trader  would  be  able  to 
exchange  the  object  for  other  desirable  things. 

Diminishing  utility.    Desire  and  utility  are  reverse  aspects  of 
the  same  thing.    The  desire  exists  in  the  human  being  and  is 
that  which  the  object  of  the  desire  is  capable  of  satisfying. 
Utility  exists  in  the  object  outside  the  human  being  and  is  that 
which  is  capable  of  satisfying  his  desire.    In  proportion  as  the 
human    being's    de- 
sire is  capable  of  be-         A 
ing  satisfied,  in  that 
proportion  does  the 
utility    of    the    ob- 
ject which   satisfies 
that  desire  diminish 
as   its   quantity   in- 
creases.    This   diminishing   utility   of    a    desirable    object   is 
sometimes  illustrated  by  means  of  a  diagram,  of  which  the 
above  will  serve  as  a  sample. 

Let  us  measure  the  quantity  of  a  certain  commodity  along  the 
line  OX,  and  the  intensity  of  the  desire  for  it  along  the  line  OF. 
When  the  quantity  is  represented,  for  example,  by  the  line  OG, 
each  unit  is  desired  with  an  intensity  represented  by  the  line 
OE ;  and  when  the  quantity  is  represented  by  the  line  OH,  the 
desire  is  so  well  satisfied  that  the  intensity  of  the  desire  is  now 
represented  by  the  line  OF.  If  the  quantity  were  to  increase 
^until  it  was  represented  by  the  line  OD,  all  desires  would  be 
satiated  ;  that  is,  the  desire  for  any  particular  unit  of  the  supply 
would  have  no  intensity , — there  would  be  no  desire  left.  And, 
finally,  if  the  quantity  were  to  increase  still  further,  the  com- 
modity might  be  considered  as  a  nuisance,  and  men.  might 
begin  to  desire  to  have  less  of  it  rather  than  more.  The  curve 
A  BCD  becomes  the  utility  curve  according  to  the  assumptions. 
Just  what  shape  this  curve  would  take  in  any  individual  case 


352 


PRINCIPLES  OF  NATIONAL  ECONOMY 


would  be  hard  to  determine.  One  thing,  however,  is  certain 
(and  this  is  the  really  essential  thing),  that,  whatever  its 
shape,  it  is  a  descending  curve.  Its  distance  from  the  line  OX 
diminishes  as  we  approach  the  point  D.  That  is  as  certain  as 
that  a  desire  is  satiable.  Therefore  we  are  safe  in  using  a 
descending  curve  to  illustrate  the  decline  in  the  intensity  of 
the  desire  for  a  commodity  as  the  quantity  of  the  commodity 
increases  in  proportion  to  the  number  of  people  who  desire  it. 
The  total  utility  of  the  commodity  is  represented  by  the 
surface  bounded  by  the  lines  OX,  OY}  and  the  curve  A  BCD. 
Its  marginal  utility  (that  is,  the  effective  utility  of  any  single 
unit  of  the  supply)  is  represented  by  the  line  OE  or  BG 
when  the  quantity  is  OG,  and  by  the  line  OF  or  CH  when 
the  supply  is  OH. 


Y 


D 


-X 


O    D 


If  now  we  consider  two  commodities  whose  quantities  and 
utilities  are  represented  by  the  two  diagrams  above,  we  shall 
see  how  the  relative  intensity  of  the  desires  for  the  two  com- 
modities will  affect  their  relative  values. 

Let  us  assume  that  the  curves  ABC  in  the  two  diagrams  rep- 
resent the  diminishing  intensity  of  the  desire  for  potatoes  and 
oranges  respectively,  and  the  line  OD  in  each  diagram  the 
available  quantity  of  each  commodity.  The  quantity  of  pota- 
toes being  so  much  larger  than  that  of  oranges,  the  desire  for 
them  is  much  more  nearly  satiated  than  is  the  desire  for 
oranges,  though  the  total  utility  of  potatoes  is  much  greater ; 
that  is  to  say,  a  pound  of  potatoes  out  of  the  total  supply  is 
very  slightly  esteemed  or  desired,  whereas  an  equal  quantity  of 
oranges  out  of  the  much  smaller  supply  is  more  highly  esteemed 


WHAT  DETERMINES  VALUE  353 

or  desired.  Under  these  circumstances  a  pound  of  oranges 
would  have  as  much  power  in  exchange  as  several  pounds  of 
potatoes ;  that  is,  oranges  are  more  valuable  than  potatoes. 

By  increasing  the  number  of  diagrams  the  relative  power  in 
exchange  of  a  number  of  commodities  could  be  illustrated  in 
the  same  way.  That,  however,  would  introduce  no  new  prin- 
ciple, but  would  only  complicate  matters. 


CHAPTER  XXVI 
SCARCITY 

Causes  of  scarcity.  It  was  shown  in  the  last  chapter  that 
commodities  must  be  both  desirable  and  scarce  in  order  to 
possess  value.  We  have  now  to  inquire  why  such  things  are 
scarce.  There  are  four  reasons  which  come  within  the  limits 
of  our  comprehension.  These  we  may  call  (i)  "the  niggard- 
liness of  nature,"  (2)  the  expansion  of  desires,  (3)  the  cost 
of  production,  and  (4)  monopoly. 

"Niggardliness  of  nature."  When  the  term  "niggardliness 
of  nature"  is  used,  it  is  not  intended  to  cast  reflections  upon 
nature  nor  to  imply  that  she  is  not  bounteous  in  many  respects. 
It  is  merely  to  call  attention  to  a  fact  which  cannot  well  be  dis- 
puted ;  namely,  that  in  many  places  men  have  congregated  in 
numbers  greater  than  nature  has  there  provided  for.  Desirable 
things  are  scarce  in  those  places  at  least,  and  it  is  at  least  neces- 
sary to  bring  supplies  from  other  places  where  there  is  a  sur- 
plus. Moreover,  there  are  many  things  which  we  desire  which 
nature  does  not  supply  at  all  in  the  form  in  which  we  desire 
them,  though  she  supplies  the  raw  materials  out  of  which  we 
may  make  them.  Again,  some  things  which  we  desire  can  be 
produced  only  at  certain  times  and  seasons.  They  must  there- 
fore be  preserved  and  kept  for  other  times  when  they  will 
be  needed. 

Expansion  of  desires.  The  fact  that  nature  does  not  supply 
us  with  everything  we  desire  in  the  exact  forms  and  at  the  exact 
times  and  places  when  and  where  we  happen  to  desire  them 
may  be  in  part  due  to  the  fact  that  we  desire  more  refined  prod- 
ucts than  grow  in  a  natural  state,  or  to  the  fact  that  great 
numbers  of  us  choose  to  live  in  places  where  such  products  do 
not  grow  in  sufficient  abundance.  It  is  only  a  symptom  of  the 

354 


SCARCITY 


355 


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356  PRINCIPLES  OF  NATIONAL  ECONOMY 

maladjustment  between  man  and  nature.  It  is  not  necessarily 
the  fault  of  either  man  or  nature ;  it  is  simply  a  fact  of  experi- 
ence, and  we  must  make  the  best  of  it.  There  is,  however,  a 
marked  tendency  for  human  desires  to  expand.  "When  goods 
increase,  they  are  increased  that  eat  them."  In  the  language  of 
the  day,  "The  richer  we  get,  the  more  we  want."  Therefore 
we  must  expect  an  indefinite  continuation  of  the  condition 
wherein  some  desirable  things  are  insufficient  in  quantity  to 
satisfy  everybody.  We  shall  therefore  continue  trying  to  in- 
crease the  supply  of  desirable  things  in  the  forms  in  which  they 
are  wanted  and  at  the  times  when  and  the  places  where  they  are 
wanted.  This  is  called  the  production  of  utilities,  or,  more 
properly,  the  adding  of  utilities  to  material  things, —  form 
utility,  time  utility,  and  place  utility. 

Cost.  If  the  efforts  which  we  have  to  make  in  order  to  pro- 
duce utilities  were  altogether  pleasant  and  not  in  the  least  de- 
gree unpleasant  or  disagreeable,  there  is  no  reason  why  most 
things  might  not  be  produced  in  such  abundance  as  to  satisfy 
everybody  completely.  Some  things,  of  course,  cannot  be  in- 
creased by  any  human  effort.  Meteoric  iron  has  long  served  as 
an  illustration.  Autographs  of  distinguished  men  of  the  past, 
the  paintings  of  old  masters,  first  editions  of  books,  and  a  num- 
ber of  other  illustrations  might  be  given.  But  if  we  are  speak- 
ing of  an  ordinary  reproducible  commodity  we  are  safe  in 
saying  that  unless  there  were  some  difficulty  in  the  way  of 
indefinite  reproduction, — some  unpleasantness,  irksomeness, 
or  fatigue  connected  with  its  production, — its  supply  would 
certainly  increase  until  everyone  had  all  he  wanted  of  it. 

Effort  not  always  irksome.  Illustrations  are  not  hard  to  find 
of  desirable  commodities  which  have  to  be  secured  by  human 
effort,  but  which,  because  the  effort  is  pleasant  rather  than 
unpleasant,  become  so  abundant  as  to  command  no  price.  Trout 
are  generally  regarded  as  a  delicacy  and  are  greatly  desired. 
They  can  only  be  caught  by  considerable  muscular  effort  and 
by  the  exercise  of  great  patience  and  skill.  And  yet,  in  certain 
communities  where  the  demand  is  not  very  great  and  the  fishing 


SCARCITY  357 

not  too  arduous,  trout  are  caught  for  sport  in  such  numbers  as 
to  supply  the  neighborhood.  They  become  free  goods  and  are 
given  to  those  who  desire  them  without  money  and  without 
price.  If  there  were  more  consumers,  or  fewer  persons  who 
enjoyed  the  sport  of  fishing,  there  would  not  be  enough  to  go 
around.  Those  who  did  not  get  as  many  as  they  desired  would 
then  be  willing  to  pay  a  price  in  order  to  get  more.  In  other 
neighborhoods  flowers  are  grown  for  pleasure.  The  demand  not 
being  very  great,  and  there  being  a  number  of  people  who  enjoy 
gardening,  there  is  such  an  abundance  that  everyone  is  sup- 
plied free  of  charge.  Poultry-raising  is  a  pleasure  to  many 
people  if  they  do  not  have  to  work  too  hard  at  it.  In  most 
neighborhoods,  however,  there  is  a  demand  for  eggs  and  poultry 
that  cannot  be  completely  satisfied  with  the  products  of  those 
who  keep  poultry  for  the  pleasure  of  it.  In  order  to  induce 
these  to  produce  more  than  is  pleasurable  and  to  induce 
others  to  do  the  work  who  do  not  enjoy  it  at  all  a  price  must 
be  paid.  The  price  is  paid,  virtually,  to  overcome  the  disin- 
clination of  producers. 

Cost  is  disinclination.  All  the  reproducible  products  which 
sell  on  the  market  and  which  are  not  monopolized  are  limited  in 
supply  by  some  form  of  disinclination  or  reluctance  to  carry  on 
the  work  of  production.  This  disinclination  may  resemble  that 
which  one  finds  in  the  average  fisherman,  gardener,  or  poultry- 
keeper,  to  whom  the  work  in  small  doses  is  not  irksome,  or  it 
may  be  of  a  different  sort  altogether.  In  the  case  of  the  fisher- 
man, the  gardener,  and  the  poultry-keeper,  their  work  may  be 
pleasant  rather  than  unpleasant  up  to  a  certain  point.  Almost 
anyone  likes  a  certain  amount  of  this  kind  of  work,  though 
some  of  us  are  easily  satisfied.  Beyond  that  point  such  work 
becomes  irksome  and  fatiguing,  and  we  keep  at  it  only  on  condi- 
tion that  someone  pays  us  for  it.  Up  to  that  point  it  was  play ; 
beyond  that  point  it  literally  becomes  work. 

Opportunity  cost.  Where  two  kinds  of  work  are  pleasurable 
and  one  has  to  choose  between  them,  the  fact  that  one  has  to 
surrender  the  one  form  of  pleasure  in  order  to  pursue  the  other 


358  PRINCIPLES  OF  NATIONAL  ECONOMY 

introduces  an  element  of  cost  or  sacrifice.  It  is  reported  of  a 
certain  man  that  he  was  passionately  fond  of  gardening,  but 
could  never  stick  to  it  because  as  soon  as  he  began  to  dig  he 
found  worms,  and  they  reminded  him  of  fishing,  of  which  he 
was  even  fonder  than  of  gardening,  which  then  became  irksome. 

In  other  cases  the  work  is  disagreeable  from  the  very  start. 
There  is  no  element  of  play  in  it.  No  one  will  do  any  of  it 
unless  he  is  paid  for  it.  In  still  other  cases  the  work  itself 
would  be  pleasurable  rather  than  disagreeable  up  to  a  certain 
point,  if  it  were  not  for  the  fact  that  there  is  something  else 
that  one  would  rather  be  doing.  A  boy  might  not  ordinarily 
mind  working  in  the  garden,  but  when  there  is  a  circus  in  town 
or  a  ball  game  going  on,  gardening  suffers  in  his  estimation  by 
comparison  with  these  other  opportunities.  Whenever  we  have 
to  work  long  hours,  there  are  pretty  certain  to  be  many  other 
and  more  pleasurable  things  which  we  would  rather  do.  Having 
to  give  up  these  other  opportunities  would  make  our  work 
irksome  even  if  it  were  not  so  of  itself. 

The  resistance  which  has  to  be  overcome  in  order  to  get  men 
to  work.  Cost,  or  cost  of  production,  is  the  general  name  which 
we  apply  to  the  resistance  which  has  to  be  overcome  in  order 
to  get  a  thing  produced.  The  real  resistance  is  the  resistance 
of  the  human  will,  as  shown  by  the  fact  that  even  though  physi- 
cal effort  has  to  be  put  forth,  so  long  as  the  effort  is  pleasurable 
it  does  not  have  to  be  paid  for.  As  soon  as  it  becomes  irksome 
it  has  to  be  paid  for.  It  is  a  matter  of  choice,  and  the  price 
paid  is  a  means  of  influencing  choice.  The  irksomeness  of  the 
effort  causes  men  to  choose  against  putting  forth  the  effort ; 
the  price  paid  for  the  article  causes  them  to  choose  in  favor  of 
it.  Such  words  as  " irksome,"  "unpleasant,"  or  "diasagreeable" 
describe  certain  efforts  as  they  appeal  to  the  mind.  The  words 
" disinclination"  and  "reluctance"  describe  the  attitude  of  the 
mind  toward  the  effort  which  men  would  not  be  willing  to  make 
unless  they  were  rewarded  for  it. 

Distinction  between  play  and  work.  The  difference  between 
play  and  work  is  found  just  here.  Play  is  effort  of  both  mind 


SCARCITY  359 

and  body  which  is  put  forth  for  the  sheer  pleasure  of  the  effort 
itself.  Work  is  effort  which  is  put  forth  for  the  sake  of  a  reward 
which  is  detachable  from  the  effort  or  the  action.  Under  very 
favorable  circumstances  all  necessary  effort  might  conceivably 
take  the  form  of  play,  and  in  that  case  there  would  be  no  such 
thing  as  cost  of  production.  A  community  made  up  of  people 
with  very  simple  habits  and  very  strenuous  natures,  and  in  a 
very  favorable  environment,  might  possibly  reach  such  a  delec- 
table state.  Having  very  simple  habits,  the  inhabitants  of  this 
community  would  be  able  to  get  the  greater  part  of  their  higher 
satisfactions  out  of  those  things  whereof  nature  is  bounteous, 
such  as  the  sky,  the  clouds,  the  verdure,  and  pleasant  company. 
Living  in  a  very  favorable  environment  they  could  produce  such 
things  as  had  to  be  produced  with  little  effort.  Having  very 
strenuous  natures,  abounding  in  energy  and  delighting  in  effort, 
they  could  do  the  necessary  work  of  production  without  any 
disinclination  or  reluctance.  This,  however,  would  be  a  kind 
of  earthly  paradise  which  we  may  dream  about  but  are  not 
likely  to  realize. 

Kinds  of  cost.  When  we  say  that  the  price  of  an  article  has 
to  be  high  enough  to  cover  the  cost  of  production,  we  really 
mean  that  it  has  to  be  high  enough  to  overcome  the  disinclina- 
tion of  men  to  do  whatever  is  necessary  in  order  to  produce  it. 
This  disinclination  or  cost  is  of  various  kinds  and  degrees. 
Mention  has  been  made  of  those  operations  which  are  inher- 
ently disagreeable  from  the  very  start.  This  may  be  called 
disutility  or  pain  cost.  In  other  cases  there  is  no  disinclination 
until  the  work  has  been  carried  so  far  as  to  produce  a  sense  of 
fatigue.  This  may  be  called  fatigue  cost.  Again,  the  disin- 
clination may  be  due  to  the  fact  that  the  work  in  question 
prevents  us  from  doing  something  else  which  we  would  rather 
be  doing.  This  is  called  opportunity  cost.  Opportunity  cost 
arises  whenever,  in  order  to  do  a  certain  thing,  one  must  give 
up  the  doing  of  something  else  which  would  be  advantageous  or 
pleasurable  to  oneself.  The  advantage  which  one  gives  up  may 
be  of  two  kinds :  it  may  be  pleasurable  in  itself  (that  is,  it  may 


360  PRINCIPLES  OF  NATIONAL  ECONOMY 

be  play  or  amusement)  or  it  may  consist  in  the  opportunity  to 
earn  money  at  some  other  job.  In  either  case  one  must  be  paid 
for  doing  the  thing  in  question,  even  though  it  is  neither  pain- 
ful nor  fatiguing;  otherwise  one  will  avail  oneself  of  another 
advantageous  opportunity. 

Pain  cost.  Of  these  three  forms  of  cost,  pain  cost  is,  in  our 
day,  the  least  important.  In  a  rude  society,  when  conditions 
were  hard  and  enemies  numerous,  it  may  have  been  different. 
Nowadays,  outside  of  a  few  dirty,  dangerous,  or  otherwise 
disagreeable  occupations,  there  is  comparatively  little  work 
which  is  disagreeable  in  itself.  When  hours  are  long  work  is 
often  fatiguing  and  irksome  for  that  reason.  But  as  pros- 
perity and  well-being  increase  and  general  social  conditions 
improve,  opportunity  cost  comes  to  play  a  more  and  more 
important  part.  The  possession  of  high  wages  or  a  large  in- 
come creates  opportunities  for  amusement  or  pleasure  which 
otherwise  would  not  exist.  One  then  finds  long  hours  more 
irksome  than  they  would  otherwise  be,  not  because  they  are 
more  fatiguing  but  because  they  deprive  one  of  those  opportuni- 
ties for  pleasure  which  one's  larger  income  enables  one  to  enjoy, 
A  well-educated  man  has  more  opportunity  for  the  pleasurable 
exercise  of  his  faculties  than  an  uneducated  man ;  therefore  he 
needs  more  time  in  which  to  do  these  pleasurable  things.  If  his 
services  are  desired  he  must  generally  be  paid  more  in  order 
to  induce  him  to  give  up  these  other  opportunities.  Far  more 
important  than  that,  however,  is  the  fact  that  a  well-trained 
man  has  many  more  opportunities  to  earn  money  than  an  un- 
trained man.  Among  these  opportunities  he  will  choose  only 
the  one  which  he  likes  best.  Whoever  desires  his  services  or 
his  products  must  therefore  bid  against  all  other  opportuni- 
ties which  lie  before  the  trained  man.  Work  is  not  more  pain- 
ful or  more  fatiguing  to  the  trained  man  than  to  the  untrained 
man,  but  his  labor  costs  more  because  of  the  opportunities  which 
he  gives  up  when  he  decides  to  do  a  certain  kind  of  work. 

Increasing  cost.    As  population  increases  or  concentrates  in 
certain  areas,  the  natural  resources  of  those  areas  must  either 


SCARCITY  361 

be  worked  more  intensively  or  else  the  means  of  subsistence  as 
well  as  the  raw  materials  of  industry  must  be  brought  from 
greater  distances.  To  bring  them  from  greater  distances  ob- 
viously requires  greater  effort  unless  new  and  improved  methods 
of  transportation  are  invented.  Even  with  the  best  methods 
attainable  it  costs  more  to  haul  longer  than  to  haul  shorter 
distances.  To  work  mines  harder  tends  to  exhaust  them  more 
rapidly.  It  is  also  possible  to  work  land  so  intensively  as  to 
exhaust  the  soil  unless  great  care  is  taken  to  put  back  in  the 
soil  as  much  plant  food  as  is  used  up  by  the  crops  which  are 
taken  off.  To  exhaust  either  the  mines  or  the  soil  will  obviously 
make  greater  and  greater  efforts  necessary  if  a  large  population 
is  to  be  provided  for  on  the  same  scale  as  before  the  exhaustion 
took  place.  Poorer  mines  must  be  worked  and  crops  must  be 
grown  on  poorer  soil,  where  more  effort  is  required  to  get  the 
same  crop. 

Diminishing  returns  and  increasing  cost.  Entirely  apart  from 
the  exhaustion  of  the  soil,  however,  is  the  great  law  of  diminish- 
ing returns  from  land.  This  law,  which  is  one  phase  of  the 
universal  law  of  variable  proportions,  will  be  discussed  in  detail 
in  a  chapter  devoted  to  that  subject  (see  Chapter  XXXIII). 
For  our  present  purpose  it  is  only  necessary  to  state  and  define 
the  law. 

It  is  a  well-known  fact  that  land  yields  more  per  acre  under 
intensive  than  under  extensive  cultivation.  By  intensive  culti- 
vation is  meant  the  application  of  considerable  quantities  of 
labor  and  capital  to  each  unit  of  land  ;  by  extensive  cultivation 
is  meant  the  application  of  smaller  quantities  of  labor  and  capi- 
tal. While  land  can  be  made  to  yield  more  when  large  than 
when  small  quantities  of  labor  and  capital  are  used  in  its  culti- 
vation, still  there  are  limits  to  this  rule.  In  the  cultivation  of 
any  particular  crop  there  comes  a  point  beyond  which  it  does 
not  seem  possible,  by  any  amount  of  labor,  care,  or  cultivation, 
to  increase  the  yield  appreciably.  Long  before  this  point  is 
reached,  however,  there  is  a  tendency  for  the  land  to  yield  less 
in  proportion  to  the  labor  and  capital  employed,  even  though  it 


362 

continues  to  yield  slightly  more  per  acre  with  each  increased 
application  of  labor  and  capital  to  its.  cultivation. 

As  a  result  of  this  law  more  effort  is  required  to  get  from  the 
soil  of  a  given  area  subsistence  for  a  large  than  for  a  small 
population.  Rather  than  incur  the  increasing  cost  of  produc- 
tion which  would  be  necessary  if  an  increasing  population  should 
attempt  to  get  its  subsistence  from  the  same  soil,  men  have 
uniformly  chosen  to  spread  their  cultivation  over  wider  areas 
(thereby  incurring  increased  cost  in  transportation)  or  they 
have  resorted  to  inferior  soils  within  the  boundaries  of  the 
original  area,  or  they  have  done  both.  There  is  no  good  rea- 
son in  the  world  why  they  should  ever  have  done  either  of 
these  things  except  that  which  is  furnished  by  the  law  of 
diminishing  returns.  If  they  could  have  doubled,  trebled,  and 
quadrupled  the  production  on  the  original  area  of  good  soil 
by  merely  doubling,  trebling,  and  quadrupling  the  labor  and 
capital  used  in  its  cultivation,  there  would  never  have  been 
any  reason  for  extending  their  cultivation.  But  when  they 
found  that  by  doubling  the  labor  and  capital  they  did  not 
double  the  yield,  even  though  the  yield  did  increase  some- 
what, then  they  had  an  excellent  reason  for  extending  the  area 
of  cultivation. 

We  have,  therefore,  several  reasons  why  increasing  effort  is 
necessary  to  get  increasing  supplies  for  an  increasing  popula- 
tion. The  law  of  diminishing  returns  is  one ;  the  tendency 
toward  the  exhaustion  of  the  soil,  mines,  and  other  natural 
resources  is  another ;  the  necessity  of  cultivating  inferior  soils 
is  another ;  and  that  of  transporting  materials  greater  distances 
is  still  another.  All  of  these,  however,  are  closely  joined  to- 
gether and  mutually  determine  one  another.  Add  to  these 
the  fact  that  increasing  effort  becomes  increasingly  irksome 
because  of  increasing  fatigue  and  increasing  opportunity  cost, 
and  we  have  what  may  be  known  as  the  law  of  increasing  cost. 
This  law  of  increasing  cost,  in  turn,  is  the  chief  factor  in  limit- 
ing production  and  keeping  the  supply  of  various  commodities 
so  scarce  as  to  give  them  a  value. 


SCARCITY  363 

Monopoly.  Among  the  factors  which  tend  to  make  commodi- 
ties scarce  nowadays,  one  of  the  most  important  is  monopoly. 
A  monopoly  is  an  agency  which  has  sufficient  control  over  the 
supply  of  a  given  commodity  to  fix  its  price.  Without  this  con- 
trol over  supply,  any  attempt  to  fix  prices  above  that  level  which 
would  pay  the  cost  of  production  would  merely  tempt  other 
producers  to  enter  the  field  and  take  the  market  away  from  the 
would-be  monopoly.  A  high  price  would  stimulate  the  outside 
and  independent  producers  to  increase  their  output.  Until  the 
would-be  monopoly  is  in  a  position  to  prevent  anything  of  this 
kind,  it  has  not  won  the  unenviable  privilege  of  being  called  a 
genuine  monopoly.  Any  agency  which  has  succeeded  in  getting 
control  of  the  supply  of  a  commodity  has  become  a  monopoly, 
or  at  least  a  partial  monopoly,  whether  it  likes  to  be  called  by 
that  name  or  not.  Aside  from  the  government,  probably  no 
such  thing  as  an  absolute  monopoly  exists.  A  partial  monopoly 
exists  whenever  an  organization  exercises  sufficient  control 
over  the  supply  of  anything  to  enable  it  to  fix  its  prices,  even 
within  a  narrow  zone,  independently  of  competition.  This 
means  that  the  power  of  a  partial  monopoly  over  prices  is  not 
absolute.  It  may  fix  the  price  somewhat  higher,  but  not  much 
higher,  than  competition  would  fix  it.  Where  a  monopoly  is 
not  absolute,  if  it  attempts  to  fix  prices  outside  these  limits  it 
will  create  competition  and  destroy  its  power  to  control. 

This  control  may  be  exercised  in  two  ways  :  first  the  monop- 
oly may  decide  upon  the  quantity  to  be  produced  and  then  sell 
that  quantity  for  whatever  it  will  bring  on  the  market,  allowing 
the  law  of  demand  and  supply  to  fix  the  price ;  second,  the  mo- 
nopoly may  decide  upon  the  price  at  which  it  will  sell  the  prod- 
uct and  then  produce  only  as  much  as  can  be  sold  at  that  price. 
This  is  the  method  usually  followed.  In  either  case  the  supply 
is  limited  by  the  will  of  the  monopoly  and  not  by  the  cost  of 
production.  In  a  genuinely  competitive  industry  the  supply  is 
limited  by  the  cost  of  production.  Producers  will  stop  produc- 
tion rather  than  sell  for  any  considerable  time  below  the  cost 
of  production. 


CHAPTER  XXVII 

MONEY 

Money  a  labor-saving  invention.  One  of  the  greatest  of  all 
labor-saving  devices  is  money.  If  one  will  try  to  imagine  the 
difficulties  of  carrying  on  exchange  without  the  use  of  money 
(that  is,  by  means  of  direct  barter),  one  will  easily  understand 
how  great  a  convenience  money  is.  Of  course,  without  the  use 
of  some  kind  of  money  we  never  could  have  developed  our 
present  highly  specialized  industrial  system,  under  which  each 
individual  does  that  for  which  he  is  best  fitted  and  exchanges  his 
products  or  services  for  the  products  and  services  of  other 
people  who  are  likewise  doing  that  for  which  they  are  best 
fitted.  But  even  if  we  could  imagine  such  an  industrial  system 
based  on  barter,  the  difficulties  would  seem  almost  insuperable. 
The  tailor  who  had  made  a  coat  and  desired  bread  in  exchange 
might  find  difficulty  in  finding  a  baker  who  happened  to  want 
a  coat ;  even  if  he  found  such  a  baker,  it  would  be  difficult  for 
the  tailor  to  carry  home  as  much  bread  as  the  coat  would  be 
worth.  By  some  kind  of  credit  system,  of  course,  the  baker 
could  credit  him  with  a  large  number  of  loaves  of  bread,  to  be 
called  for  one  at  a  time.  The  dairyman  who  had  milk  to  sell 
would  find  it  difficult  to  know  how  to  collect  payment  for  the 
very  small  quantities  which  he  delivered  to  the  butcher,  the 
baker,  the  tailor,  etc.  These  difficulties  would  be  so  great  that 
in  all  probability  there  would  be  comparatively  little  exchange. 
The  farmer  would  have  to  be  his  own  butcher,  tailor,  and  shoe- 
•maker.  Each  household,  in  fact,  would  have  to  be  almost 
self-sufficing. 

So  important  is  the  function  of  money  in  modern  industrial 
society  that  some  writers  have  seen  fit  to  divide  systems  of  econ- 
omy into  two  fundamental  types,  known  as  the  barter  economy 

364 


MONEY  365 

and  the  money  economy.  Certain  savage  tribes  who  live  in  a 
state  of  primitive  communism  get  along  without  much  exchang- 
ing. Their  limited  commerce  with  the  other  tribes  is  carried 
on  by  means  of  barter ;  furs  and  other  articles  of  their  own  pro- 
duction are  exchanged  for  outside  products  which  they  desire. 
The  introduction  of  money  makes  possible  a  great  deal  of  ex- 
changing within  the  tribe  and  is  supposed  to  have  marked  one 
of  the  epochs  in  the  economic  development  of  civilized  peoples. 
Various  substances  which  have  served  as  money.  Various 
commodities  or  articles  have  served  the  purpose  of  money.  The 
early  colonists  in  America  found  the  Indians  using  a  kind  of 
currency  known  as  wampum,  or  bead  currency.  The  Hudson 
Bay  Company  and  other  companies  that  traded  with  the  In- 
dians of  the  interior  developed  a  skin,  or  fur,  currency,  in 
which  the  skins  of  various  animals  were  recognized  as  standards 
of  value  and  exchanged  at  the  ratios  agreed  upon.  In  ancient 
times  various  European  peoples  used  cattle  as  currency.  In 
the  Homeric  poems  values  are  frequently  quoted  in  terms  of 
cattle.  A  very  amusing  and  at  the  same  time  instructive  illus- 
tration is  given  in  a  paper  entitled  "  Rudimentary  Society  among 
Boys,"  by  John  Johnson,  in  the  Johns  Hopkins  University 
Studies  in  History  and  Political  Science,  Second  Series,  No.  n. 
In  this  primitive  boy  society  butter  was  used  as  money. 

Butter  and  pie  in  boys1  society.  Commonly  the  primary  object 
of  the  hunters  is  to  obtain  a  handsome  collection  of  curiosities,  and 
to  enjoy  the  satisfaction  of  possession  along  with  the  esteem  inspired 
by  success ;  but  occasionally  a  boy  hunts  with  a  purely  commercial 
end  in  view.  I  have  been  told  of  one  who  made  a  practice  of  ex- 
changing all  the  eggs  he  found  for  the  allowance  of  butter  given  to 
his  companions  at  meals.  This  latter  is  dealt  out  to  the  boys  in 
approximately  equal  portions  of  an  ounce  weight,  and  is  frequently 
used  by  them  as  a  means  of  exchange  and  measure  of  value.  A  flying 
squirrel  has  been  known  to  bring  fifteen  "butters,"  and  a  sling,  five 
"butters."  The  unit  is  subdivided  once,  the  fractional  piece  being 
known  as  the  "half-butter"  and  having  a  purchasing  power  about 
equal  to  that  of  one  cent.  Some  boys  who  entered  upon  the  manufac- 


366  PRINCIPLES  OF  NATIONAL  ECONOMY 

ture  of  taffy  obtained  the  needed  butter  by  buying  it  from  the  rest 
at  the  price  of  two  cents  for  one  "butter,"  payment  being  made,  at 
the  option  of  the  seller,  either  in  money  or  in  taffy. 

Their  transactions  are  often  so  complicated  that  the  boys  find  it 
desirable  to  lessen  the  number  of  payments  of  this  novel  currency, 
and  they  employ  for  this  purpose  a  system  of  verbally  transferring 
their  claims  from  one  to  another,  somewhat  as  merchants  use  negoti- 
able notes.  Perhaps  A  buys  a  knife  from  B  for  ten  "butters."  B 
has  an  outstanding  debt  of  the  same  amount  for  marbles,  and  he 
transfers  to  his  creditor  C  his  claim  against  A,  who  pays  to  C  or  to 
anyone  else  whom  C  may  designate. 

At  first  glance  this  use  of  butter  as  money  seems  laughably  odd ; 
but  in  fact  it  could  be  easily  paralleled  by  long  lists  of  articles  equally 
far  removed  from  the  gold,  silver,  and  paper  of  our  own  currency, 
which  have  yet  served  as  money  in  different  parts  of  the  world.  The 
wampum  of  the  early  Indians  is  familiar  to  all  readers,  and  Jevons 
and  Roscher  enumerate,  among  many  other  substances  that  have  been 
so  used,  corn,  wolfskins,  whales'  teeth,  and  straw  mats.  The  former 
of  these  distinguished  authors  remarks  that  "it  is  entirely  a  ques- 
tion of  degree  what  commodities  will  in  any  given  state  of  society 
form  the  most  convenient  currency"  and  our  boy -state  being  in  a 
condition  where  butter  served  the  purpose,  its  citizens  adopted  that 
commodity  as  their  money. 

Professor  H.  B.  Adams  added  a  footnote  to  the  above,  which 

reads  as  follows : 

At  Phillips  Exeter  Academy,  New  Hampshire,  in  my  day,  there 
was  a  pie  currency  in  vogue  among  the  boys  who  boarded  in  Abbot 
Hall.  Pie  was  something  of  a  luxury,  for  it  was  furnished  by  "  Burn- 
ham,"  the  steward,  only  twice  a  week.  The  idea  of  value  in  exchange 
was  naturally  connected  with  our  Saturday  and  Sunday  allowance  of 
pie ;  in  fact,  there  was  a  constant  trading  of  different  sorts  of  pie,  a 
boy  offering  his  mince  or  custard  pie  of  one  week  for  the  apple  or 
pumpkin  pie  that  was  to  come  the  next  week.  Pie  debts  were,  more- 
over, incurred  in  a  variety  of  ways,  chiefly  for  services  rendered, —  for 
example,  by  one's  chum  in  making  the  fire  on  a  cold  morning,  when 
it  was  not  his  turn,  or  by  one  student  in  aiding  another  in  his  lessons, 
etc.  Boys  would  wager  their  pie  sustenance  for  a  week,  and  some- 


MONEY  367 

times  for  a  month,  on  a  match  game  of  ball.  These  young  bar- 
barians, at  their  ball  play,  used  to  rival  the  ancient  Germans,  who,  as 
Tacitus  describes,  sometimes  staked  not  only  their  property  but 
their  very  freedom  in  games  of  chance.  What  could  be  greater  reck- 
lessness for  a  hungry  boy  than  to  risk  his  pie  for  a  month  on  the 
issue  of  a  game  of  baseball  ?  In  ordinary  transactions  the  unit  of 
pie  value  at  Exeter  was  the  "piece,"  which  was  served  us  on  a 
special  plate;  but  there  were  as  many  standards  of  value  as  there 
were  sorts  of  pie,  so  that  in  the  settlement  of  a  small  debt  of  one  or 
two  "  pieces,"  boys  sometimes  sought  to  pay  their  creditors  in  pie  of 
an  inferior  or  less  marketable  quality.  Poor  pie  was  like  trade  dol- 
lars. Sometimes  a  creditor  would  find  himself  with  an  embarrassment 
of  riches.  If  his  debtors  insisted  on  paying  off  their  obligations  on  one 
day  in  one  sort  of  pie,  he  would  be  obliged  to  eat  up  all  his  perishable 
substance  at  once,  or  to  dispose  of  it  at  a  considerable  sacrifice. 

So  great  is  the  need  for  money  in  a  society  where  there  is  any 
exchange  of  desirable  articles  that  almost  anything  which  is 
commonly  used  and  appreciated  may  serve  the  purpose  of 
money.  Among  primitive  herdsmen,  cattle  meet  the  conditions. 
They  are  universally  esteemed  and  appreciated,  they  are  famil- 
iar objects  whose  value  is  generally  understood,  and  they  are 
easily  transferable.  They  lack,  however,  certain  other  qualities 
which  make  modern  metallic  money  convenient. 

Qualities  which  the  money  material  should  possess.  Jevons, 
in  his  "  Money  and  the  Mechanism  of  Exchange,"  names  seven 
qualities  which  are  desirable  in  the  material  of  which  money  is 
made.  They  are,  first,  utility  and  value  ;  second,  portability ; 
third,  indestructibility  ;  fourth,  homogeneity ;  fifth,  divisibility ; 
sixth,  stability ;  and,  seventh,  cognizability.  Cattle  possess  only 
the  first,  second,  and  seventh  of  these  qualities,  and  perhaps,  to 
a  slight  degree,  the  sixth.  That  they  are  useful  to  primitive 
herdsmen  is  rather  obvious.  They  furnish  their  own  portability 
in  that  they  can  carry  themselves  about.  They  possess  cogni- 
zability because  all  are  familiar  with  them.  There  may  be  a 
fair  degree  of  stability  also  in  their  value,  though  that  is  by  no 
means  certain.  The  skins  of  animals,  used  as  money  by  hunting 


368  PRINCIPLES  OF  NATIONAL  ECONOMY 

tribes,  possess  the  same  qualities  as  cattle,  but  still  lack  the 
others  which  Jevons  deems  desirable.  The  "butters,"  as  used 
in  the  rudimentary  society  mentioned  above,  seem  to  possess 
everything  except  indestructibility. 

Precious  metals  especially  adapted.  It  has  been  found  that 
the  precious  metals,  especially  gold  and  silver,  possess  all  these 
qualities  in  superior  degree.  If  by  utility  we  mean  desirability, 
or  the  capacity  to  satisfy  a  desire,  there  is  no  doubt  that  gold 
and  silver  possess  this  quality.  If  we  were  to  take  a  narrow  and 
somewhat  puritanical  view  of  utility  we  might  question  this. 
They  possess  portability  because  there  is  considerable  value  in 
small  bulk.  This  would  not  be  true  of  the  coarser  metals.  They 
possess  indestructibility  to  a  high  degree ;  they  do  not  corrode 
or  rust  as  iron  would.  They  possess  homogeneity, — that  is, 
gold  of  equal  purity  is  essentially  alike  the  world  over;  it 
may  be  easily  standardized  as  to  quality,  so  that  one  piece  of 
metal  may  be  equally  desirable  with  every  other  piece  of  the 
same  size  and  standard  of  fineness.  They  possess  divisibility ; 
that  is,  a  piece  of  gold  or  silver  may  be  divided  into  smaller 
pieces,  and  each  of  the  smaller  pieces  will  have  value  in  pro- 
portion to  its  size.  This  would  not  be  true  of  diamonds  and 
precious  stones,  though  these  would  possess  portability  and 
indestructibility  in  high  degree.  Gold  and  silver  possess  sta- 
bility of  value  in  a  very  peculiar  sense.  Over  long  periods  of 
time  they  will  fluctuate  considerably,  but  over  short  periods  of 
time  (that  is,  from  week  to  week,  from  day  to  day,  from  hour 
to  hour)  they  will  fluctuate  very  little ;  whereas  other  commodi- 
ties, such  as  farm  products,  pig  iron,  and  other  articles  which  are 
dealt  in  largely,  fluctuate  rapidly  over  short  periods  of  time. 

Reasons  for  the  stability  of  gold  prices.  One  reason  for  the 
stability  of  the  value  of  the  precious  metals  over  short  periods 
is  that  the  mass  of  gold  or  silver  in  existence  at  any  one  time  is 
very  large  in  proportion  to  the  product  of  any  given  year.  The 
total  amount  of  wheat  in  existence  at  the  present  moment  has 
practically  all  been  produced  within  the  last  year,  or  two  years 
at  the  outside.  Of  the  total  gold  in  existence  a  very  small  frac- 


MONEY  369 

tion  was  produced  within  the  last  year  or  two.  Suppose  you 
had  a  large  reservoir  of  water,  fed  by  a  very  small  pipe.  If  the 
flow  through  the  small  pipe  were  to  vary  considerably  from  day 
to  day,  it  would  make  very  little  difference  in  the  total  quantity 
of  the  reservoir ;  though  if  the  increase  or  decrease  kept  up  for 
many  years,  there  might  be  a  considerable  change  in  the  quan- 
tity in  the  reservoir.  This  is  analogous  to  the  case  of  gold.  The 
total  quantity  in  existence  is  like  the  quantity  of  water  in  the 
reservoir ;  the  total  annual  production  is  like  the  quantity  which 
flows  into  the  reservoir  through  a  very  small  pipe.  The  case  of 
wheat  is  like  that  of  a  small  reservoir  fed  by  a  very  large  pipe. 
Any  change  in  the  quantity  flowing  through  the  pipe  is  likely 
to  make  a  considerable  change  in  the  quantity  in  the  reservoir. 
That  is  to  say,  a  large  crop  of  wheat  in  one  year  will  make  a 
great  difference  in  the  total  quantity  available  for  the  world's 
supply.  A  crop  failure,  on  the  other  hand,  will  make  a  con- 
siderable shortage  in  the  world's  supply.  The  value  of  wheat, 
therefore,  fluctuates  rapidly  over  short  periods  of  time.  Since 
it  would  take  a  number  of  years  of  excess  production  of  gold  to 
make  an  appreciable  difference  in  the  total  quantity  available 
for  the  world's  supply,  gold  does  not  fluctuate  much  from  day  to 
day,  from  week  to  week,  or  even  from  year  to  year. 

Since  most  of  the  transactions  in  which  we  use  money  are 
short-time  rather  than  long-time  transactions,  it  is  more  impor- 
tant that  the  money  material  be  stable  in  value  over  short 
periods  than  that  it  be  stable  in  value  over  long  periods.  Occa- 
sionally we  invest  our  money  in  something  which  we  expect  to 
last  a  long  time  (in  such  cases  we  are  interested  in  the  stability 
of  the  value  of  money  over  long  periods),  but  most  of  our  pur- 
chases are  made  from  day  to  day.  The  average  business  transac- 
tion has  very  little  relation  to  long  periods  of  time.  This  is  one 
of  the  principal  reasons  why  gold  and  silver  serve  the  purpose 
of  a  money  material  better  than  most  other  products.  In  this 
respect  gold  has  proved  to  be  superior  even  to  silver. 

Cognizability.  As  to  cognizability,  the  superiority  of  gold 
and  silver  over  other  materials  is  not  so  great.  The  expert  can 


PRINCIPLES  OF  NATIONAL  ECONOMY 


always  apply  tests  by  means  of  which  he  can  detect  spurious 
coins,  but  the  inexpert  usually  has  to  depend  upon  his  eyes  and 
his  ears  and  his  sense  of  touch.  But  there  are  not  many  other 
substances  which  cannot  be  adulterated  or  of  which  counter- 
feits may  not  be  made.  Gold  and  silver  are  not  particularly 
wanting  in  cognizability,  though  they  are  not  preeminently 
superior  in  this  respect. 

Convenience  of  handling.  For  certain  minor  coins,  how- 
ever, neither  gold  nor  silver  is  well  adapted.  There  is  so  much 
value  in  such  small  bulk  in  gold,  for  example,  that  one  would 
need  a  magnifying  glass  and  tools  more  delicate  than  the  human 
fingers  to  handle  gold  coins  of  the  value  of  our  five-cent  pieces 
and  one-cent  pieces.  Mere  physical  convenience  requires  a 
coarser  metal  for  these  small  values.  Even  the  gold  dollar, 
which  once  was  coined  in  the  United  States,  proved  too  small 
and  inconvenient,  and  its  coinage  was  therefore  suspended.  The 
forms  of  money  now  in  existence,  in  the  United  States  are  indi- 
cated in  the  following  outline : 


KIXDS  OF  MONEY  IN  THE  UNITED  STATES 


COIN 


Gold- 


PAPEK 


[  Double  eagle 

Eagle 

Half  eagle 
[  Quarter  eagle 

r  Dollar 

Half  dollar 
Silver-^  „ 

Quarter 

[Dime 

Nickel  (five-cent  piece) 
Bronze  (one-cent  piece) 
(  Gold  certificates 

Silver  certificates 

Treasury  notes 

United  States  notes  (greenbacks) 

National  bank  notes 

Federal  Reserve  notes 

Federal  Reserve  Bank  notes 


MONEY  371 

The  coins  are  sufficiently  familiar  to  require  no  description. 
Their  differences  appeal  readily  to  the  eye.  It  is  noticeable, 
however,  that  comparatively  few  people  note  carefully  the  dif- 
ferent kinds  of  paper  currency.  Anyone  who  has  coins  in  his 
pocket  can  tell  you  instantly  to  which  class  each  coin  belongs. 
Comparatively  few  people,  however,  can  tell  you  about  the  dif- 
ferent pieces  of  paper  money  in  their  pockets. 

The  first  three  forms  of  paper  currency  mentioned  in  the 
above  outline  may  be  called  warehouse  receipts.  For  the  con- 
venience of  the  people  the  Federal  Treasury  issues  these  re- 
ceipts in  return  for  deposits  of  other  forms  of  money.  If,  for 
example,  one  has  a  large  quantity  of  gold  or  silver  coin  and 
desires  something  more  convenient,  he  may  deposit  the  coin  with 
the  Secretary  of  the  Treasury  and  receive  in  return  gold  or 
silver  certificates.  These  merely  certify  that  the  coin  has  been 
deposited  in  the  Treasury.  These  certificates  then  circulate  as 
money.  Gold  certificates  are  issued  against  deposits  of  gold, 
and  silver  certificates  against  deposits  of  silver.  A  silver  cer- 
tificate, for  example,  reads  :  "This  certifies  that  there  have  been 
deposited  in  the  Treasury  of  the  United  States  of  America — 
silver  dollars,  payable  to  the  bearer  on  demand."  The  Treasury 
notes  were  issued  in  the  purchase  of  silver  bullion  under  an  act 
authorizing  such  purchase.  They  have  almost  disappeared  from 
circulation,  having  been  redeemed  by  the  coinage  of  the  bullion 
for  the  purchase  of  which  they  were  issued.  The  United  States 
note,  popularly  known  as  the  greenback,  is  issued  by  the  Fed- 
eral government  as  pure  credit  currency.  It  has  on  its  face, 
among  other  things,  "  The  United  States  will  pay  to  the  bearer 
—dollars."  The  issue  of  these  notes  was  authorized  by  act 
of  Congress  during  the  Civil  War  as  a  means  of  financing 
the  war ;  that  is,  as  a  means  of  paying  the  obligations  of  the 
government.  The  amount  then  authorized,  with  only  a  slight 
reduction,  has  been  kept  in  circulation  ever  since.  The  national 
bank  notes  are  technically  known  as  national  currency.  They 
are  secured  by  United  States  bonds  or  other  securities  deposited 


372  PRINCIPLES  OF  NATIONAL  ECONOMY 

with  the  Secretary  of  the  Treasury.  They  are  issued  to  the 
bank  making  the  deposit  and  bear  on  their  face  the  name  of  the 
bank.  It  is  the  bank,  however,  which  agrees  to  pay,  rather  than 
the  government;  the  government  merely  stands  back  of  the 
bank.  A  bank  note  has  on  its  face,  among  other  things,  uThe 

—National  Bank  of will  pay  to  the  bearer  on 

demand—  dollars." 

The  Federal  Reserve  notes  are  issued  to  the  Federal  Reserve 
Banks  by  an  agent  of  the  United  States  Treasury.  They  are 
sent  to  the  member  banks  by  the  Federal  Reserve  Banks  in 
return  for  deposits  of  commercial  paper,  and  are  then  put  into 
circulation  by  the  local,  or  member,  banks.  The  Federal  Re- 
serve Bank  notes  are  used  as  yet  only  to  a  small  extent.  They 
are  issued  to  the  Federal  Reserve  Banks  by  the  United  States 
Treasury  in  return  for  deposits  of  government  bonds,  being  in 
all  essentials  like  the  national  bank  notes  which  they  are 
intended  to  replace. 

Standard  money.  Among  all  these  forms  of  money  there  is 
one  which  is  known  as  standard  money ;  that  is,  gold  coin.  The 
value  of  the  gold  coin  depends  on  the  value  of  the  material  of 
which  it  is  made.  So  long  as  the  present  policy  of  the  govern- 
ment is  maintained,  the  value  of  a  gold  coin  can  never  vary 
appreciably  from  that  of  the  metal  which  it  contains.  One 
reason  for  this  is  that  the  government  will  undertake  to  coin  all 
the  gold  that  is  brought  to  the  mint  and  to  charge  nothing  for 
the  work  of  coining  except  the  value  of  the  alloy  which  is  put 
in.  Since  this  alloy  also  has  some  value,  this  virtually  means 
that  if  you  bring  to  the  mint  not  only  the  gold  but  also  the  other 
materials  which  go  into  the  coin,  in  the  proper  ratio,  the  govern- 
ment does  the  work  of  coining  free  of  charge ;  you  merely 
supply  the  raw  material.  Therefore,  when  there  is  even  the 
slightest  tendency  for  the  value  of  coin  to  rise  above  that  of 
bullion,  men  will  anticipate  this  tendency  by  taking  bullion  to 
the  mint.  Since  coin  is  easily  melted  down  into  bullion,  if 
bullion  showed  the  slightest  tendency  to  exceed  coin  in  value 
that  would  be  anticipated  by  melting  coin  down  into  bullion. 


MONEY  373 

These  two  processes  make  it  practically  certain  that  so  long  as 
the  government  can  maintain  its  policy  gold  coin  and  bullion 
will  be  identical  in  value. 

Token  currency.  Gold  is  the  only  form  of  money  now  in 
circulation  in  the  United  States  which  is  actually  standard 
money.  The  exchange  value  of  a  silver  coin  is  greater  than  that 
of  the  metal  of  which  it  is  made.  The  same  is  true  of  the  nickel 
and  bronze  and  conspicuously  true  of  the  paper.  The  general 
name  applied  to  these  other  forms  of  money  is  "  token  currency." 
They  are  accepted  in  exchange  not  because  of  the  value  of  the 
material  of  which  they  are  made  but  because  they  stand  as 
tokens,  or  representatives,  of  some  other  form  of  value.  With 
the  currency  certificates,  gold  certificates,  and  silver  certificates 
this  is  perfectly  plain,  because  the  bank  agrees  to  pay  other 
forms  of  money.  Even  with  the  silver  coins,  while  there  is  no 
direct  agreement  to  exchange  gold  for  them,  the  practice  pre- 
vails. In  addition  to  this  and  quite  as  important  also  is  the 
fact  that  the  government  itself  receives  all  these  forms  of  cur- 
rency in  payment  of  obligations  to  itself.  Thus  you  can  pay 
your  taxes,  you  can  buy  postage  stamps,  you  can  pay  customs 
duties,  and  any  other  obligation  which  you  owe  to  the  govern- 
ment in  these  other  forms  of  currency.  Technically  the  United 
States  notes,  or  greenbacks,  are  not  legal  tender  for  payment 
of  customs  dues,  but  as  a  matter  of  fact  they  are  receivable. 
By  legal-tender  currency  is  meant  any  currency  with  which  you 
can  pay  a  debt  and  compel  the  creditor  to  take  that  or  nothing. 
You  can  offer,  or  "tender,"  him  the  amount  of  the  debt,  and  he 
cannot  demand  some  other  form  of  currency.  Most  of  our 
forms  of  currency  are  legal  tender  for  any  amount,  except  our 
smaller  coins,  which  are  legal  tender  for  only  limited  amounts. 
They  thus  represent  in  that  indirect  sense  a  real  value,  or  they 
serve  these  valuable  purposes  for  their  possessors.  In  the  third 
place,  some  of  them  are  declared  to  be  legal  tender;  that  is, 
you  can  pay  your  debt,  not  only  to  the  government  but  to  any- 
one else  to  whom  you  owe  money,  by  offering  various  forms  of 
token  currency  as  well  as  by  offering  gold. 


374  PRINCIPLES  OF  NATIONAL  ECONOMY 

The  question  has  frequently  been  raised,  Why  use  such 
expensive  materials  as  gold  and  silver  for  money?  Would 
not  some  cheap  substance,  such  as  paper  or  aluminum,  serve 
equally  well  ?  Many  long  and  heated  controversies  have  been 
waged  over  this  question.  The  so-called  "hard-money"  school 
have  taken  the  position  that  the  government  cannot  make 
money,  it  can  only  stamp  money.  The  stamp  merely  serves  as 
a  certificate  of  its  weight  and  fineness ;  the  market  itself  must 
then  determine  its  value.  The  "  soft-money  "  school,  on  the  con- 
trary, have  pointed  to  many  historic  instances  in  which  cheap 
materials  have  actually  served  as  money  and  circulated  at  a 
value  which  bore  no  relation  to  the  value  of  the  substance  of 
which  it  was  made.  The  truth  seems  to  be  summarized  as 
follows :  ( i )  Long-established  customs,  in  a  country  such,  for 
example,  as  China,  where  custom  rules  supreme,  may  enable  a 
kind  of  money  to  circulate  at  a  customary  value  regardless  of 
the  commercial  value  of  the  material  of  which  it  is  made. 
(2 )  A  government  which  is  in  the  habit  of  using  a  great  deal  of 
compulsion  over  a  people  who  are  in  the  habit  of  submitting 
to  authority  and  compulsion  may  by  its  own  decree  cause 
money  to  circulate  at  legally  established  rates  without  regard 
to  the  commercial  value  of  the  substance  of  which  it  is  made. 
But  a  government  which  is  not  in  the  habit  of  exercising  a  great 
deal  of  compulsion,  and  a  people  who  are  not  in  the  habit  of 
submitting  to  it,  have  to  rely  mainly  upon  voluntary  agreement 
among  individuals  inmost  of  the  relations  of  life.  (3)  Where  vol- 
untary agreement  rather  than  government  compulsion  is  mainly 
depended  upon,  it  has  hitherto  proved  impossible  to  get  people 
voluntarily  to  agree  upon  any  substance  as  the  material  for 
standard  money  except  something  which  has  had  a  value  as  raw 
material  commensurate  to  its  value  as  money.  (4)  Cheaper 
substances  may,  however,  be  used  in  limited  quantities  as  token 
money  even  in  liberal  countries  where  everything  is  done  by  vol- 
untary agreement :  (a)  when  standard  money  will  be  exchanged 
for  it;  (b)  when  the  government  will  accept  it  in  payment  to 
itself;  (c)  in  small  quantities  when  the  government  exercises 


MONEY  375 

its  authority  by  compelling  a  creditor  to  accept  it  in  payment  of 
a  debt  when  offered  by  a  debtor.  This,  however,  is  an  exercise 
of  compulsion,  but  it  is  one  to  which  many  even  of  the  liberal 
governments  resort. 

The  scale  of  prices  and  the  value  of  money.  It  is  commonly 
understood  that  a  general  rise  in  prices  of  all  commodities  is  the 
same  as  a  fall  in  the  purchasing  power  of  money,  and  a  general 
fall  in  prices  as  a  rise  in  the  purchasing  power  of  money.  When 
a  dollar  buys  a  great  deal,  it  has  high  purchasing  power  but  com- 
modities are  cheap.  When  it  buys  very  little,  its  purchasing 
power  is  low  but  commodities  are  dear.  It  is  very  important, 
therefore,  that  we  study  this, — one  of  the  most  intricate  and 
difficult  of  all  economic  questions. 

Upon  the  question  What  determines  the  purchasing  power 
of  money?  there  has  been  much  disagreement.  There  are  a 
few  certainties,  however,  and  they  should  be  understood  by 
anyone  who  hopes  to  avoid  confusion  in  the  more  detailed 
discussions. 

Standard  money.  In  the  preceding  discussion  it  was  stated 
that  gold  is  the  standard  money  in  the  United  States.  It  is  the 
only  kind  of  money  in  this  country  that  derives  its  value  from 
the  material  of  which  it  is  made,  and  the  government  makes  no 
effort  to  give  it  a  purchasing  power  higher  than  that  of  gold 
bullion  of  equal  weight.  In  the  case  of  every  other  form  of  cur- 
rency the  purchasing  power  is  greatly  in  excess  of  that  of  the  ma- 
terial of  which  it  is  made.  This  excess  value  is  due  to  a  special 
effort  of  the  government.  This  special  effort  is  for  the  specific 
purpose  of  giving  to  every  other  kind  of  dollar  a  purchasing 
power  equal  to  that  of  the  gold  dollar.  The  gold  dollar,  con- 
sisting of  25.8  grains  of  gold,  nine  tenths  pure,  is  thus  the 
standard  dollar.  Every  other  dollar  is  given  a  value  equal  to 
that  of  a  gold  dollar  mainly  by  the  method  of  interchangeability 
or  of  redemption.  So  long  as  the  government  is  willing  and 
able  to  give  gold  in  exchange  for  other  forms  of  currency,  and 
to  accept  other  forms  in  payment  to  the  government  on  the 
same  terms  as  gold,  every  citizen  is  practically  as  desirous  of 


376  PRINCIPLES  OF  NATIONAL  ECONOMY 

having  these  other  forms  as  of  having  gold  coin,  and  they  will 
have  the  same  purchasing  power  as  gold  coin. 

The  gold  standard.  In  this  country  we  have  what  is  called 
free  and  gratuitous  coinage  of  gold.  By  the  free  coinage  of 
gold  is  ordinarily  meant  that  the  government  places  no  restric- 
tions upon  the  quantity  of  gold  that  may  be  coined.  Anyone 
who  cares  to  have  gold  bullion  made  into  gold  coin  can  have  it 
done  without  limit  as  to  quantity.  By  gratuitous  coinage  is 
meant  that  the  government  makes  no  charge  for  the  work  of 
coining  the  bullion.  Accordingly,  therefore,  the  holder  of  a 
quantity  of  gold  bullion  of  the  required  fineness  can  take  it  to 
the  mint  and  receive  in  return  an  equal  weight  of  gold  coin. 
If  any  charge  is  made,  it  is  only  for  the  necessary  alloy  to  bring 
the  bullion  to  the  same  standard  as  that  required  in  the  coin. 
It  is  pretty  certain,  so  long  as  this  practice  continues,  that 
gold  coin  can  never  be  worth  more  than  the  bullion  of  which 
it  is  made.  In  short,  wherever  the  free  and  gratuitous  coin- 
age of  gold  coin  is  practiced  by  the  government,  gold  coin 
and  gold  bullion  of  equal  weight  and  fineness  must  always  have 
equal  values. 

Seignorage.  If,  however,  any  government  for  any  reason 
suspends  the  free  and  gratuitous  coinage  of  gold,  the  parity  of 
value  may  easily  disappear.  If  the  government  suspends  the 
free  coinage  (that  is,  if  it  sets  a  limit  to  the  quantity  of  coin 
it  will  manufacture  or  of  bullion  that  it  will  make  into  coin) 
it  might  easily  happen  that  coin  would  come  to  be  worth  more 
than  bullion  of  equal  weight.  Again,  if  instead  of  coining  the 
gold  gratuitously  the  government  were  to  charge  for  it  or  make 
a  seignorage  charge,  as  it  is  called,  the  value  of  the  coin  would 
tend  to  equal  that  of  the  bullion  plus  the  cost  of  manufacturing ; 
that  is,  plus  the  seignorage.  But  since  the  more  enlightened  and 
progressive  nations  have  practiced  both  the  free  and  the  gratui- 
tous coinage  of  gold,  it  has  happened,  as  a  matter  of  course, 
that  gold  coin  has  had,  in  all  the  great  financial  centers,  the 
same  value  as  the  material  of  which  it  has  been  made.  In  such 
countries  nothing  can  change  the  value  of  gold  coin  unless  it 


MONEY  377 

can  also,  at  the  same  time,  change  the  value  of  uncoined  gold 
or  gold  bullion. 

The  silver  standard.  Many  countries,  particularly  in  Latin 
America,  use  silver  as  the  basic  metal  and  make  silver  coin  the 
standard  money.  In  those  cases  all  that  has  been  said  concern- 
ing gold  and  gold  coin  in  gold-standard  countries  can  be  re- 
peated with  respect  to  silver  and  silver  coin  in  silver-standard 
countries. 

Maintaining  the  parity  of  gold  and  paper  currency.  Even 
though  other  forms  of  currency  are  in  circulation  in  any  coun- 
try, and  there  are  many  kinds  even  in  this  country  (see  page 
370),  every  enlightened  government  tries,  so  far  as  possible,  to 
maintain  a  parity  between  these  other  forms  and  its  standard 
money.  In  this  and  other  gold-standard  countries  this  means 
that  the  effort  is  made  to  keep  all  other  forms  of  currency  on  a 
parity  with  gold.  In  the  United  States,  for  example,  it  would  be 
looked  upon  as  little  short  of  a  disaster  if  a  paper  dollar  of  any 
kind  or  description  or  a  silver  dollar  should  not  purchase  as 
much  as  a  gold  dollar  on  the  open  market.  Our  government 
failed  to  maintain  this  parity  for  a  number  of  years  during  and 
following  the  great  Civil  War  of  1861-1865.  Every  European 
government  that  was  engaged  in  the  World  War  of  1914-1918 
also  failed  in  this  respect.  In  all  these  cases  gold  was  scarce 
and  hard  to  get  and  paper  money  became  cheap. 

Redemption  of  paper  currency.  The  method  by  which  all 
these  other  ^orms  of  currency  are  held — if  they  are  held — at  a 
parity  with  gold  is  very  much  the  same,  fundamentally,  as  that 
by  which  the  parity  between  gold  coin  and  gold  bullion  is 
maintained.  That  is  the  method  of  interchangeability.  So  long 
as  any  holder  of  one  can  always  and  freely  get  the  other  in 
exchange  for  it,  it  is  not  likely  that  either  one  will  ever  have 
greater  purchasing  power  than  the  other.  The  reason  is  that  if 
anyone  even  suspected  that  the  kind  in  his  possession  might 
have  less  purchasing  power  than  the  other,  he  would  at  once 
exchange  it  for  the  other.  .  So  long  as  the  government  stood 
ready  and  able  to  exchange  either  one  for  the  other  in  unlimited 


378  PRINCIPLES  OF  NATIONAL  ECONOMY 

quantities,  it  would  be  impossible  for  one  to  have  greater  or  less 
purchasing  power  than  the  other.  This  is  as  true  of  gold  and 
paper  money,  or  gold  and  silver,  as  of  gold  coin  and  gold  bullion. 

Suspension  of  specie  payments.  But  when  the  government  is 
no  longer  willing  or  able  to  exchange  one  for  the  other  in  the 
quantities  presented,  it  is  extremely  unlikely  that  the  parity  of 
value  will  be  preserved.  When  the  reason  for  the  government's 
inability  to  do  this  is  the  vast  amount,  let  us  say,  of  paper 
currency  in  circulation  and  the  small  amount  of  gold  left  in  the 
country  because  of  shipments  of  gold  to  foreign  countries  for 
the  purchase  of  supplies,  it  is  an  absolute  certainty  that  the 
parity  cannot  be  maintained.  When  a  government  can  no 
longer  exchange  standard  money  for  paper  currency,  it  is  said 
to  suspend  specie  payments.  This  is  merely  a  confession  of  its 
inability  to  get  enough  standard  money  to  exchange  for  all  the 
paper  that  is  being  presented.  There  is  nothing  then  to  keep 
paper  money  from  becoming  cheaper  than  gold ;  that  is,  to 
prevent  a  paper  dollar  from  having  less  purchasing  power  than 
a  gold  dollar. 

Value  of  irredeemable  paper.  The  question  next  arises,  Why 
does  paper  currency  have  any  purchasing  power  whatever  when 
the  government  is  no  longer  able  to  "redeem"  it  or  to  give 
standard  money  in  exchange  for  it?  We  need  first  to  distinguish 
between  different  kinds  of  paper  currency.  As  was  shown  in 
the  preceding  chapter,  gold  certificates  and  silver  certificates 
and  Treasury  notes  are  merely  warehouse  receipts,  certifying 
that  gold  or  silver  has  been  deposited  with  the  Treasury  and 
is  payable  to  bearer  on  demand.  If  the  government  refused 
or  were  unable  to  pay  gold  or  silver  on  demand  for  these 
certificates,  they  would  then  be  like  any  other  form  of  paper 
money  for  which  the  government  would  not  exchange  gold. 
How  much  value  would  they  have  ?  The  United  States  notes, 
or  greenbacks,  are  not  warehouse  receipts,  and  there  is  no 
special  quantity  of  metal  kept  on  hand  for  their  redemption. 
They  are  more  nearly  like  a  personal  note  of  an  individual,  in 
that  the  government  is  bound  to  pay  them,  whenever  they  are 


MONEY  379 

presented  for  payment,  with  any  money  it  happens  to  have  or 
can  lay  hands  on.  If  the  government  refused  to  pay  or  redeem 
them,  how  much  value  would  they  have  ?  National  bank  notes, 
Federal  Reserve  notes,  and  Federal  Reserve  Bank  notes  rest 
first  on  the  credit  of  the  banks,  though  ultimately  on  that  of 
the  government.  If  neither  the  banks  nor  the  government  could 
redeem  them,  how  much  value  would  they  have? 

Things  that  make  a  demand  for  paper  money.  There  are  sev- 
eral things  that  make  paper  currency  desirable  and  therefore 
valuable,  even  though  the  holder  cannot  get  standard  money 
for  it.  In  the  first  place,  if  the  government  will  receive  it 
for  taxes  or  duties,  or  in  the  purchase  of  postage  stamps, 
that  alone  would  make  it  somewhat  desirable  and  therefore 
it  would  have  some  value.  Again,  if  it  is  made  legal  tender 
for  debts,  this  will  give  it  an  additional  value.  If  it  is  made 
legal  tender  for  debts,  it  means  that  anyone  who  owes  a  debt 
can  pay  it  in  this  kind  of  money  and  the  creditor  must  accept 
it.  The  creditor  may  not  like  it,  but  from  the  standpoint  of 
every  debtor  this  kind  of  money  becomes  somewhat  desirable 
and  therefore  has  some  value.  With  these  two  elements  of 
desirability  it  is  pretty  certain  that  paper  money  would  have 
some  desirability  and  some  value  even  though  the  govern- 
ment were  never  likely  to  redeem  it  in  standard  money.  If 
it  existed  in  small  quantities,  so  that  every  dollar  of  it  could 
probably  be  used  in  one  of  these  two  ways,  or  every  possessor 
was  pretty  certain  to  find  one  of  these  two  uses  for  it,  there 
is  every  reason  to  believe  that  it  might  maintain  its  parity 
with  standard  money.  While  not  redeemable  in  standard 
money,  it  is  a  partial  substitute  for  it  or,  rather,  it  is  a  per- 
fect substitute  for  it  in  two  of  the  uses  to  which  standard 
money  is  put. 

Hope  of  future  redemption.  In  most  cases  of  suspended 
specie  payments,  there  is  the  expectation  of  resumption  at  some 
time  in  the  future ;  that  is,  though  the  government  may  not 
now  be  giving  standard  money  in  exchange  for  paper,  it  is 
understood  that  it  will  begin  doing  so  just  as  soon  as  it  can. 


380  PRINCIPLES  OF  NATIONAL  ECONOMY 

This  also  helps  to  make  paper  money  desirable  and  therefore 
valuable.  A  great  deal  depends,  of  course,  on  the  confidence 
which  the  people  have  in  the  ability  of  the  government  to 
resume  specie  payments  and  how  soon  they  expect  it  to 
begin.  During  our  Civil  War  it  has  been  shown1  that  the 
disparity  between  gold  and  paper  increased  when  there  was 
bad  news  from  the  Union  armies  and  decreased  when  there 
was  good  news.  This  showed  very  clearly  that  people  thought 
more  highly  of  paper  money  when  it  looked  as  though  the  war 
would  soon  be  won  by  the  Federal  government  than  when  it 
looked  otherwise.  While  the  quantity  of  paper  money  in 
circulation  was  considerable,,  and  would  probably  have  caused 
it  to  lose  some  of  its  purchasing  power,  nevertheless  the  expec- 
tation that  it  would  sooner  or  later  be  redeemed  in  gold  obvi- 
ously had  a  great  deal  to  do  with  giving  it  such  purchasing 
power  as  it  had. 

Custom.  In  addition  to  all  these  factors  which  help  to  give 
irredeemable  paper  money  some  purchasing  power  in  any 
'country,  there  is  the  fact  of  custom,  which,  in  some  countries, 
plays  an  important  part.  The  habit  of  handling  a  certain  kind 
of  money  may,  with  the  lapse  of  time,  become  so  well  estab- 
lished as  to  lead  most  of  the  people  to  care  very  little  whether 
it  is  ever  redeemed  or  not.  If  the  government  quietly  stops 
redeeming  in  standard  money,  and  if  many  of  the  people  do 
not  care  anything  about  it,  the  money  may  go  on  circulating 
for  a  time  as  though  nothing  had  happened.  But  where  large 
sums  of  money  are  needed  in  international  trade,  in  which  local 
.customs  play  no  part,  this  is  a  factor  that  cannot  be  relied  upon 
to  keep  irredeemable  paper  money  in  circulation.  At  best  it 
has  a  limited  application. 

Fiat  money.  In  those  countries  where  the  government  is  in 
the  habit  of  exercising  a  great  deal  of  authority  and  the  people 
of  yielding  a  great  deal  of  obedience,  a  mere  government  fiat 
may  go  a  long  way  toward  keeping  irredeemable  paper  money 

1See  W.  C.  Mitchell,  A  History  of  the  Greenbacks,  pp.  203,  204.  The  Uni- 
versity of  Chicago  Press,  1903. 


MONEY  381 

in  circulation.  Let  such  a  government  decree  that  a  certain 
kind  of  paper  money  shall  be  accepted  in  all  sales  and  threaten 
with  dire  punishment  anyone  who  refuses  to  accept  it :  a  docile 
people  may  submit  and  such  a  currency  may  circulate  (for  a 
time),  especially  if  there  is  not  too  much  of  it. 

Quantity  a  factor.  In  all  these  cases  the  question  of  the 
quantity  of  the  irredeemable  paper  currency  is  an  important 
but  not  the  only  factor.  It  is  true  that  a  smaller  quantity 
would  circulate  and  possess  a  higher  purchasing  power  than  a 
larger  quantity.  It  is  equally  true  that  with  the  same  quantity 
the  expectation  of  future  redemption,  ,the  willingness  of  the 
government  to  accept  it  in  lieu  of  standard  money  in  the  pay- 
ment of  taxes  and  public  dues,  the  existence  of  a  legal-tender 
law,  the  influence  of  custom,  and  the  habits  of  the  people 
in  the  matter  of  obedience  to  the  government  will  all  have 
something  to  do  with  the  purchasing  power  of  paper  money. 

In  the  case  of  silver  in  this  country  there  is,  in  addition  to  all 
that  has  been  said  about  paper,  the  fact  that  the  silver  of  which 
it  is  made  has  some  value  in  itself.  This  alone  makes  a  silver 
coin  somewhat  desirable  and  gives  it  some  value.  The  afore- 
mentioned factors  add  to  that  desirability  and  value. 

Effect  of  credit  currency.  Another  and  somewhat  more  dif- 
ficult question  arises  with  respect  to  redeemable  currency  in  a 
country  that  actually  maintains  the  parity  of  its  redeemable 
currency  with  its  standard  money.  How  does  an  increase  in 
credit  currency,  for  example,  affect  the  purchasing  power  of 
money,  assuming  that  its  parity  with  gold  is  constantly  main- 
tained ?  If  the  parity  of  gold  coin  and  credit  currency  is  main- 
tained and  also  that  of  gold  coin  and  gold  bullion,  no  kind  of 
money  can  become  cheaper  unless  gold  also  becomes  cheaper, 
or  dearer  unless  gold  bullion  also  becomes  dearer.  How  can 
credit  currency  make  gold  bullion  cheaper?  It  may  do  this 
by  displacing  gold  coin  and  causing  it  to  be  melted  down 
into  bullion.  If  there  were  no  credit  currency  of  any  kind  and 
all  our  business  transactions  had  to  be  carried  on  by  means  of 
gold  coin,  it  would  take  more  gold  coin  than  is  required  when 


382  PRINCIPLES  OF  NATIONAL  ECONOMY 

most  of  the  business  is  done  with  credit  instruments.1  So  much 
bullion  would  have  to  be  withdrawn  from  the  arts  and  made 
into  coin  as  to  leave  a  scarcity  in  the  arts.  This  scarcity  in  the 
arts  would  increase  its  value.  In  proportion,  however,  as  credit 
currency  displaces  gold,  gold  is  released  from  circulation  and 
made  available  for  use  in  the  arts.  This  alone,  even  if  nothing 
else  were  involved,  would  tend  to  cheapen  it  in  the  arts. 

During  and  immediately  following  the  World  War,  when  so 
much  of  the  business  of  the  world  was  done  with  credit  cur- 
rency, very  little  gold  was  actually  used  in  circulation.  This 
tended  to  make  gold  abnormally  cheap.  Even  in  this  country, 
where  the  parity  of  paper  currency  and  gold  coin  was  carefully 
maintained,  prices  were  abnormally  inflated,  in  spite  of  the  fact 
that  they  were  essentially  gold  prices.  When  the  paper  cur- 
rencies of  the  world  are  diminished  and  gold  is  again  needed  in 
circulation,  this  increased  demand  for  it  will  tend  to  raise  its 
price  and  to  decrease  the  prices  of  other  things  in  terms  of  gold. 

To  support  this  conclusion  adequately  it  is  necessary  to 
analyze  the  question  of  the  commodity  value  of  gold.  If  we 
forget,  for  a  moment,  that  gold  is  ever  used  as  money,  and  think 
of  it  as  a  metal  having  uses  in  the  arts,  we  shall  understand  that 
its  value  is  determined  precisely  as  is  that  of  any  other  commod- 
ity. In  other  words,  the  value  of  gold  is  determined  directly  by 
the  utility  of  the  marginal  increment  of  the  available  supply. 
It  is  determined  indirectly  by  the  marginal  cost  of  producing 
it,  the  cost  being  one  of  the  factors  which  determine  the  supply. 
Where  a  commodity  is  used  for  two  distinct  purposes,  whatever 
is  used  for  one  cannot  be  used  for  the  other.  That  which  is 
used  for  one  purpose  reduces  the  supply  available  for  the  other. 
The  supply  available  for  the  second  purpose  being  reduced, 
the  marginal  utility  or  value  for  that  purpose  is  increased.  In  the 
case  of  gold,  whatever  is  used  as  money  is  deducted  from  the 

JIt  is  estimated  that  at  the  present  time  (iQ2i)  there  are  approximately 
seven  dollars  of  credit  instruments  of  various  kinds  for  every  dollar  of  gold 
reserve.  This  would  indicate  that  it  takes  only  one  seventh  as  much  gold  to 
do  the  work  as  would  be  necessary,  at  the  same  scale  of  prices,  if  there  were 
no  credit  instruments. 


MONEY  383 

supply  available  for  use  in  the  arts.  If  the  total  supply  of  gold 
were  to  remain  the  same,  while  gold  should  cease  to  be  used 
as  money,  the  supply  available  for  use  in  the  arts  would  be 
increased,  and  its  value  would  of  necessity  fall. 

It  may  be  objected  that  if  the  demand  were  to  be  reduced, 
less  would  be  mined,  and  the  supply  also  would  be  reduced. 
Unless  the  failure  to  use  gold  as  money  actually  made  it 
cheaper,  there  would  be  on  that  account  no  falling  off  in  the 
amount  produced.  To  the  miner  it  would  be  a  matter  of  indif- 
ference whether  the  mints  were  closed  to  his  product  or  not, 
provided  he  could  sell  it  as  well  as  ever.  But  if  the  driving  of 
gold  out  of  circulation  and  into  the  arts  should  result,  as  it 
certainly  would,  in  cheapening  gold,  the  latter  would  occasion 
a  falling  off  in  the  amount  produced.  But  this  falling  off 
would  take  place  on  the  margin  of  production.  In  other  words, 
those  sources  of  supply  which  would  otherwise  be  worked  at 
the  greatest  cost  would  now  not  be  worked  at  all.  Only  the 
better  sources  of  supply  would  continue  to  be  worked  where 
gold  could  be  produced  at  a  cost  not  greater  than  its  reduced 
value.  Thus,  even  the  marginal  cost  of  producing  gold  under 
the  new  conditions  would  be  reduced  to  correspond  to  the  fall 
in  its  value. 

Two  uses  for  gold.  It  is  easy  to  see  that  under  the  free  and 
gratuitous  coinage  of  the  standard  money  the  value  of  the  money 
metal  must  be  the  same  in  coin  as  in  bullion.  It  is  perhaps  not 
so  easy  to  see  how  the  distribution  of  the  metal  between  the 
currency  and  the  arts  is  determined.  What  proportion  of  the 
existing  supply  of  gold  at  any  given  time  shall  go  into  circula- 
tion as  money  and  what  proportion  into  the  arts,  and  what 
determines  these  proportions?  This  is  a  part  of  the  general 
question  of  the  distribution  of  any  commodity  between  its 
different  uses.  It  will  always  tend  to  forsake  that  use  where  its 
value  is  least  and  seek  that  one  where  its  value  is  greatest,  and 
thus  keep  the  value  normally  the  same  in  all.  This  means  that 
gold  will  tend  to  distribute  itself  between  its  two  general  uses 
in  such  proportions'  that  its  marginal  utility  or  value  will  be  the 


384  PRINCIPLES  OF  NATIONAL  ECONOMY 

same  in  each.  If  for  any  reason  too  much  gold  should  for  a 
1  time  go  into  circulation  and  too  little  into  the  arts,  until  people 
needed  bullion  more  than  they  needed  coin,  bullion  would  tend 
to  rise  in  value  and  coin  to  fall.  This  would  not  only  keep  the 
new  supplies  of  gold  from  going  to  the  mint  but  would  also 
send  coin  to  the  melting-pot.  On  the  other  hand,  if  too  little 
gold  should  for  any  reason  go  into  circulation  and  too  much 
into  the  arts,  until  people  needed  coin  more  than  they  needed 
bullion,  gold  would  be  sent  to  the  mint  in  larger  quantities 
until  the  equilibrium  was  restored.  But  if  considerable  delays 
or  expenses  were  involved,  coin  would  be  certain  to  command 
a  temporary  premium  or,  as  it  would  appear  in  market  quota- 
tions, bullion  would  be  at  a  discount.  On  the  other  hand,  if  the 
process  of  reducing  coin  to  bullion  were  a  difficult  and  expen- 
sive one,  coin  might  be  at  a  discount  and  bullion  at  a  premium 
when,  for  any  reason,  too  much  gold  had  been  made  into  coin. 

Probably  the  opponents  of  the  quantity  theory  would  admit 
that  the  distribution  of  gold  between  the  arts  and  currency 
takes  place  in  some  such  manner  as  that  just  described.  But  to 
admit  that  is  to  admit  a  quantity  theory.  To  admit  that  the 
share  of  gold  which  goes  into  the  currency  is  determined  auto- 
matically by  the  needs  of  business  is  to  admit  that  the  number 
of  units  in  circulation  as  money  has  something  to  do  with  the 
value  of  each  unit.  What  is  to  prevent  all  the  new  supplies  of 
gold  from  going  to  the  mint  to  be  made  into  coin  except  the 
tendency  which  would  be  created  for  coin  to  fall  and  bullion  to 
rise  in  value  ?  Why  should  any  conceivable  degree  of  scarcity 
of  coin  induce  bullion  owners  to  go  to  the  trouble  of  sending 
their  bullion  to  the  mint  except  a  tendency  of  coin  to"  rise  in 
value  as  compared  with  bullion? 

Hitherto  this  discussion  has  been  based  upon  the  assumption 
that  gold,  or  standard  money,  formed  the  only  kind  of  currency, 
—  that  there  was  no  credit  currency.  When  we  come  to  consider 
the  effect  of  substitutes  for  standard  money  upon  the  value  of 
gold,  it  is  manifest  that,  when  a  great  many  substitutes  for  the 
gold  coin  come  into  use,  there  will  be  less  demand  for  gold  for 


MONEY  385 

the  purpose  of  coinage.  This  tendency  shows  itself  in  the 
disappearance  of  gold  coin  as  the  number  of  substitutes  in- 
creases. In  other  words,  the  increase  in  the  number  of  sub- 
stitutes for  gold  operates  for  a  time  in  precisely  the  same 
way  as  an  abnormal  increase  in  the  number  of  substitutes  for 
anything  else. 

Gresham's  law.  This  tendency  of  a  cheaper  substitute  to 
drive  out  a  more  expensive  one  is  not  peculiar  to  money.  As- 
suming that  the  cheaper  article  is  a  real  substitute  and  serves 
the  user's  purpose  just  as  well  as  the  dearer  article,  it  will  almost 
invariably  drive  out  the  dearer.  The  tendency  of  cheap  money 
to  drive  out  dear  money  is  called  Gresham's  law,  from  Sir 
Thomas  Gresham,  who  is  commonly  supposed  to  have  pointed 
it  out  in  1650.  When  a  cheaper  form  of  currency  is  legal  tender 
it  serves  the  purpose  of  a  debtor  quite  as  well  as  the  dearer ; 
that  is,  it  will  pay  a  debt  quite  as  effectually.  The  creditor 
can't  help  himself ;  besides,  he  can  turn  around  and  force  his 
own  creditors  to  take  it.  If  the  government  will  accept  it  for 
taxes  and  other  dues,  it  serves  the  taxpayer's  purposes  quite 
as  well  as  the  dearer  money.  If  there  is  enough  of  the  cheaper 
form  of  currency  to  serve  all  these  purposes,  it  tends  to  be  used 
exclusively.  The  dearer  form  then  tends  to  disappear  from 
circulation  because  there  is  no  effective  demand  for  it. 

The  quantity  theory.  That  there  is  a  connection  between 
the  quantity  of  money  in  circulation  and  the  purchasing  power 
of  each  money  unit  there  can  be  little  doubt.  That  the  quantity 
is  the  only  factor  or  even  the  principal  one  in  determining  the 
purchasing  power  of  each  unit  is  at  least  doubtful.  How  im- 
portant the  factor  of  quantity  is  in  the  determination  of  the 
purchasing  power  of  money  or  the  general  price  level  of  com- 
modities has  been  the  subject  of  much  controversy.  Those 
who  hold  to  what  is  known  as  the  quantity  theory  affirm  that, 
with  a  given  number  of  commodities  to  be  purchased,  the 
quantity  of  money  is  the  chief  factor  in  determining  its  pur- 
chasing power.  Those  who  oppose  it  affirm  that  the  quantity 
of  money  is  a  minor  factor. 


386  PRINCIPLES  OF  NATIONAL  ECONOMY 

Speed  of  circulation.  Both  sides  agree  that  the  speed  of  cir- 
culation is  also  a  factor;  that  is,  a  small  number  of  dollars 
moving  rapidly  from  person  to  person  may  buy  as  many  things 
in  a  given  time  as  a  larger  number  moving  slowly.  Money,  how- 
ever, having  no  organs  of  locomotion,  does  not  move  of  itself. 
A  piece  of  money  moves  from  one  person  to  another  only  when 
the  one  who  has  it  decides  to  buy  something  with  it.  It  appears, 
therefore,  that  the  speed  of  circulation  depends  on  how  rapidly 
people  are  buying.  When  they  buy  freely — never  allowing 
any  money  to  rest  long  in  their  pockets,  cash  drawers,  or  other 
places  of  deposit — it  circulates  rapidly;  when,  on  the  other 
hand,  they  are  not  buying  freely  but  holding  on  to  their  money 
—  keeping  it  as  long  as  possible  in  their  pockets,  cash  drawers, 
or  other  places  of  deposit — it  circulates  slowly. 

As  a  matter  of  fact,  prices  rise  when  buyers  are  trying  to 
buy  faster  than  sellers  are  willing  to  sell  at  existing  prices,  and 
fall  when  sellers  are  trying  to  sell  faster  than  buyers  are  willing 
to  buy  at  existing  prices.  Unless  an  increase  in  the  quantity  of 
money  induces  buyers  to  buy  more  or  faster  than  they  had  been 
doing,  it  can  have  no  effect  on  prices.  The  circulation  merely 
slows  down  automatically.  That  is  to  say,  if  the  people  have 
more  money  and  do  not  buy  any  more  with  it,  they  must  neces- 
sarily hold  on  to  it  a  little  longer,  carrying  more  at  any  one 
instant  in  various  places  of  deposit  or  letting  it  lie  idle.  It 
is  highly  probable,  however,  though  not  necessary,  that  when 
people  have  more  money  they  will  spend  it ;  that  is,  they  will 
begin  to  buy  more  than  they  did  when  they  had  less  money. 
When  this  happens  the  increase  in  the  quantity  of  money  in 
circulation  is  followed  by  a  general  rise  of  prices.  It  is  well  to 
remember,  however,  that  this  rise  of  prices  does  not  follow  of 
physical  necessity ;  it  only  follows  as  a  result  of  a  probable 
increase  of  purchasing.  There  is  an  approach  to  physical  neces- 
sity when  the  new  money  is  put  into  circulation  by  the  govern- 
ment in  the  purchase  of  unusual  supplies,  as  at  the  beginning  of 
a  war.  Here  is  a  definite  increase  of  purchasing  which,  unless 
balanced  by  a  corresponding  decrease  of  purchasing  by  private 


MONEY  387 

individuals,  results  in  a  necessary  increase  of  total  purchasing. 
This  is  certain  to  advance  prices  unless  production  is  at  once 
and  for  some  independent  reason  speeded  up  correspondingly. 
Such  a  speeding  up  of  production  is  not  likely  to  happen  except 
in  response  to  rising  prices.  Even  without  any  increase  in  the 
quantity  of  money,  a  similar  increase  in  government  purchasing 
is  likely  to  increase  the  total  amount  of  purchasing,  and,  if  it 
does,  it  will  tend  to  raise  prices.  Along  with  this  rise  of  prices, 
and  as  an  automatic  result  of  increased  purchasing  without  an 
increase  in  the  quantity  of  money,  there  must  come  an  increased 
speed  of  circulation.  Again,  it  must  be  remembered  that  money 
has  no  power  to  increase  its  speed  or  to  move  at  any  speed ;  it 
only  increases  its  speed  as  a  result  of  more  active  buying. 

Credit  and  the  speed  of  circulation.  It  is  not  uncommon  to 
assume  that  buying  on  credit  increases  the  speed  of  circulation  ; 
that  is  to  say,  with  a  given  quantity  of  real,  tangible  money 
much  more  buying  can  be  done  if  credit  is  highly  developed 
than  if  it  is  not.  If  we  care  to  assume  that  a  dollar  moves 
faster  when  it  lies  still  in  a  bank  as  a  part  of  the  bank's  reserve, 
while  several  dollars  in  checks  are  being  drawn  against  it,  than 
it  could  if  it  were  actually  moving  physically  from  person  to 
person,  there  is  no  positive  harm  in  doing  so.  It  would  probably 
be  just  as  clear,  however,  to  say  that  much  purchasing  is  done 
with  promises  to  pay  money,  thus  economizing  in  the  use  of 
real  money.  How  these  promises  are  made  to  do  a  part  of  the 
work  of  money  will  be  described  in  the  chapter  on  Banking 
and  Credit.  At  this  point  it  may  be  said,  however,  that  buying 
sometimes  speeds  up  through  the  enlarged  use  of  credit,  or 
buying  with  promises  to  pay  money,  when  men  literally  buy 
before  they  have  the  money  to  pay  for  their  purchases.  At  other 
times  buying  slows  down  because  sellers  lose  confidence  in 
buyers'  promises  and  will  not  accept  them.  Buyers  must  wait 
till  they  get  some  real  money  before  they  can  buy.  All  varia- 
tions in  the  rate  of  buying,  whether  they  come  through  an  in- 
crease or  decrease  in  the  quantity  of  real  physical  money, 
through  a  mere  change  in  the  willingness  of  people  to  spend 


388  PRINCIPLES  OF  NATIONAL  ECONOMY 

what  money  they  have,  through  government  purchases  of  un- 
usual quantities  of  material,  or  through  the  enlarged  or  con- 
tracted use  of  credit,  will  tend  to  produce  corresponding 
changes  in  the  general  scale  of  prices  or  the  general  purchasing 
power  of  a  piece  of  money  of  a  given  denomination. 

So  long  as  the  government  pursues  the  policy  of  keeping  all 
forms  of  money  on  a  parity  with  gold  there  can  never  be  any 
fluctuation  in  the  purchasing  power  of  money  except  as  gold 
bullion  fluctuates  in  value.  If  gold  bullion  rises  in  value,  so 
must  gold  coins  and  every  other  form  of  currency;  if  it  falls, 
they  must  all  likewise  fall.  As  a  matter  of  fact,  gold  bullion 
fell  steadily  in  value  for  more  than  twenty  years  preceding 
1920  ;  consequently  money  fell  in  value  or  purchasing  power — 
in  other  words,  prices  rose  steadily.  In  recent  months  gold  and 
money  rose  and  prices  fell.  We  need  not  here  inquire  why  gold 
rose  or  fell ;  it  might  be  because  of  factors  affecting  its  demand 
or  supply  or  it  might  be  because  of  factors  affecting  other 
commodities. 

These  fluctuations  must  be  expected  to  continue  so  long  as 
bullion  changes  in  value  and  the  standard  dollar  contains  the 
same  quantity  of  gold.  Professor  Irving  Fisher  proposes,  there- 
fore, to  stabilize  the  purchasing  power  of  the  dollar  by  changing 
the  amount  of  gold  in  it  from  time  to  time.  When  gold  rises  in 
value,  put  less  in  each  dollar ;  when  it  falls  in  value,  put  more 
in  each  dollar.  Of  course  it  would  require  very  careful  statis- 
tical calculation  to  know  just  the  right  amount  of  gold  to  add  or 
subtract  from  time  to  time,  but  this  difficulty,  while  great,  is 
not  insuperable.  If  some  other  difficulties  could  be  removed 
it  would  doubtless  be  possible  to  calculate  the  right  amount  of 
gold  to  put  into  the  dollar  from  day  to  day  to  give  it  practically 
the  same  purchasing  power  at  one  time  as  at  another. 

Another  difficulty,  apparent  rather  than  real,  is  that  of  hav- 
ing coins  of  different  weight  in  circulation  at  the  same  time. 
This  is  easily  overcome  by  not  coining  any  gold  at  all,  but  sub- 
stituting gold  certificates.  At  the  present  time  one  can  take 
gold  bullion  to  the  Treasury  and  leave  it  on  deposit,  receiving  a 


MONEY  389 

sort  of  warehouse  receipt  known  as  a  gold  certificate.  Some 
prefer  this  even  now  to  gold  coin.  When  the  certificate  is  pre- 
sented, the  same  weight  of  gold  is  returned  as  was  deposited. 
Under  the  new  plan  not  the  same  weight  but  the  same  value 
would  be  returned  as  was  deposited.  The  gold  certificate,  there- 
fore, would  always  call  for  such  a  weight  of  gold  as  would  have 
the  same  value  as  that  which  was  deposited.  There  would  be 
no  serious  difficulty  in  managing  this. 

Two  real  difficulties  present  themselves.  First,  the  govern- 
ment would  be  making  a  profit  or  incurring  a  loss  according  as 
the  value  of  gold  went  up  or  down.  When  the  value  goes  up, 
the  government  would  not  have  to  return  to  the  holder  of  gold 
certificates  as  many  ounces  of  gold  as  were  deposited  when  the 
certificates  were  issued.  It  would  therefore  have  some  gold  left. 
There  would  be  some  difficulty  in  knowing  what  to  do  with  it, 
but  probably  some  new  certificates  could  be  issued  against  it 
and  used  to  pay  a  part  of  the  running  expenses  of  government. 
On  the  other  hand,  when  gold  continues  to  fall  for  a  long  period, 
as  it  did  before  1920,  the  government  will  incur  a  loss.  It  would 
find  that  it  had  constantly  to  return  more  ounces  of  gold  than 
were  deposited.  In  short,  it  would  have  to  go  out  and  buy  gold 
to  replenish  its  stock  and  enable  it  to  redeem  its  gold  certificates. 
Even  this  might  be  worth  doing  if  it  would  stabilize  prices. 

A  more  serious  difficulty  arises  with  respect  to  foreign  trade. 
Unless  an  international  arrangement  could  be  entered  into, 
foreign  exchange  would  be  in  a  hopeless  muddle.  It  would  re- 
quire a  statistical  expert  and  a  quick  calculator  to  tell  at  any 
time  what  the  pound  sterling  or  the  franc  was  worth  in  dollars. 
It  is  hard  enough  now,  but  it  would  be  almost  impossible  then. 
This  is  probably  the  most  serious  difficulty,  unless  it  can  be 
removed  by  an  international  arrangement. 

Why  not  stabilize  gold?  Until  such  an  international  agree- 
ment can  be  arranged,  it  is  doubtful  if  any  single  country  can 
be  induced  to  make  this  experiment.  Meanwhile,  something 
can  be  done  toward  stabilizing  the  purchasing  power  of  gold 
itself  by  any  nation  that  thinks  the  stabilizing  of  prices  im- 


390  PRINCIPLES  OF  NATIONAL  ECONOMY 

portant  enough  to  be  worth  the  trouble.  In  so  far  as  the  pur- 
chasing power  of  gold  can  be  stabilized,  that  in  itself  will 
stabilize  the  dollar  without  changing  the  quantity  of  gold  in  it. 
Something  can  be  done  in  this  direction  by  a  skillful  handling 
of  the  problem  of  credit  and  credit  currency. 

It  was  shown  earlier  in  this  chapter  that  the  enlarged  use 
of  credit  enables  a  country  to  carry  on  a  given  amount  of  busi- 
ness with  less  gold  than  would  be  necessary  if  no  credit  or  less 
credit  were  used.  This  furnishes  a  clue  to  the  solution  of  the 
problem.  If  the  use  of  credit  were  restricted,  it  would  take  so 
much  gold  to  do  the  money  work  as  to  affect  appreciably  the 
total  demand  for  it.  So  much  would  have  to  be  withdrawn 
from  the  arts  to  supply  the  need  for  currency  as  to  make  a  gen- 
uine scarcity.  The  users  of  gold  in  the  arts  would  have  to  bid 
for  it  in  order  to  hold  an  adequate  supply.  This  would  tend 
to  give  it  a  higher  purchasing  power. 

Since  about  1897  the  purchasing  power  of  gold  the  world  over 
fell  continually  until  1920.  This  was  doubtless  due  mainly  to 
remarkable  increase  in  the  world's  production  of  gold  which 
began  about  ten  years  earlier.  At  the  same  time,  however,  the 
use  of  credit  instruments  had  been  growing  in  the  principal  gold- 
using  countries,  and  a  smaller  percentage  of  the  world's  busi- 
ness was  being  transacted  with  actual  gold  as  the  medium 
of  exchange.  This  tended  to  reduce  the  demand  for  gold 
below  what  it  would  otherwise  have  been.  These  two  forces, 
working  together,  produced  a  steady  decline  in  the  purchasing 
power  of  gold  and  a  steady  rise  in  commodity  prices. 

During  the  World  War  there  was  a  phenomenal  increase  in 
the  use  of  credit  currency  which  resulted  in  the  almost  complete 
nonuse  of  gold.  The  principal  gold-using  countries  of  Europe 
practically  abandoned  the  gold  standard,  at  least  temporarily, 
and  went  on  to  a  paper-money  basis ;  that  is,  they  issued  such 
quantities  of  credit  currency  and  sent  such  quantities  of  gold 
abroad  in  international  payments  as  to  make  it  impossible  to  re- 
deem paper  with  gold.  Paper  money  of  course  depreciated,  even 
in  terms  of  gold,  and  prices  in  those  countries,  quoted  in  terms 


MONEY  391 

of  depreciated  paper  currency,  soared  much  higher  than  in  this 
country,  where  prices  continued  to  be  virtually  gold  prices, 
since  we  maintained  the  parity  of  gold  and  paper.  Those 
European  countries  practically  released  all  their  gold  and 
threw  it  onto  the  markets  of  the  world,  much  of  it  coming  to 
this  country,  literally  flooding  our  market  with  it. 

In  the  United  States  we  found  ourselves  with  more  gold  than 
we  knew  what  to  do  with.  Instead  of  using  this  vast  supply  of 
gold  as  currency,  which  would  seem  to  have  been  the  part  of 
wisdom,  we  took  pains  to  use  very  little  of  it,  using,  instead, 
more  credit  currency  than  ever,  especially  in  the  form  of 
Federal  Reserve  notes.  The  monetary  policy  seems  to  have 
been  aimed  principally  or  almost  exclusively  at  the  mainte- 
nance of  the  parity  of  gold  and  paper  and  not  at  all  at  the 
maintenance  of  stable  prices  or  at  stabilizing  the  purchasing 
power  of  gold.  We  seem  to  have  taken  some  pride  in  the  fact 
that  our  paper  currency  has  not  depreciated  in  terms  of  gold, 
overlooking  the  fact  that  gold  itself  depreciated  in  terms  of 
commodities.  The  fact  that  any  kind  of  a  dollar  will  purchase 
as  much  as  a  gold  dollar  is  of  course  a  matter  of  some  impor- 
tance, but  it  would  have  been  much  more  satisfactory  if  the 
gold  dollar  had  not  lost  so  much  of  its  purchasing  power  and 
prices  had  not  risen  to  such  unprecedented  heights.  If  the 
increased  volume  of  business  occasioned  by  the  war  had  been 
carried  on  without  any  increase,  or  even  with  some  decrease,  of 
our  credit  currency,  it  would  have  taken  so  much  gold  to  do 
the  work — in  other  words,  it  would  have  so  increased  the 
demand  for  gold — as  to  give  it  a  purchasing  power  much 
higher  than  it  had.  We  should  thus  have  been  saved  from  the 
enormously  inflated  prices  of  the  war  period  and  the  train  of 
evils  that  followed  them. 

That  there  would  have  been  some  difficulties  with  such  a 
policy  goes  without  saying.  It  is  merely  a  question  whether 
we  think  that  the  evils  of  inflation  and  deflation  are  serious 
enough  to  justify  the  cost  of  preventing  them  or  not.  In  order 
to  stabilize  or  help  to  stabilize  the  purchasing  power  of  gold 


392  PRINCIPLES  OF  NATIONAL  ECONOMY 

it  is  necessary  that  the  use  of  it  or  the  demand  for  it  shall 
increase  in  times  when  its  value  is  falling  and  decrease  when  its 
value  is  rising.  The  way  to  increase  the  demand  for  it  when  its 
purchasing  power  is  falling  and  commodity  prices  are  rising 
is  to  use  fewer  substitutes,  thus  forcing  people  to  use  more  gold. 
The  way  to  decrease  the  demand  for  it  when  its  purchasing 
power  is  rising  and  commodity  prices  are  falling  is  to  use  more 
substitutes  and  release  some  of  the  gold  from  circulation. 
In  other  words,  when  commodity  prices  are  rising  (which 
means  that  the  purchasing  power  of  gold  is  falling),  credit 
currency  should  be  reduced  until  the  increased  demand  for  gold 
would  arrest  its  further  fall ;  and  when  commodity  prices  are 
falling,  more  credit  currency  should  be  issued  until  the  decreas- 
ing demand  for  gold  would  arrest  its  further  rise.  This  would 
require  not  only  expert  statistical  calculation  and  management 
but  also  great  wisdom  on  the  part  of  the  people  to  avoid  polit- 
ical tinkering  with  the  process,  but  the  difficulties  are  inher- 
ently no  greater  than  those  involved  in  changing  the  quantity 
of  gold  in  the  dollar. 

Two  kinds  of  elasticity.  One  of  the  first  difficulties  is  a 
purely  educational  one ;  namely,  that  of  correcting  our  ideas 
of  an  elastic  currency.  As  ordinarily  used,  that  term  means 
a  currency  that  expands  when  business  is  unusually  active 
and  contracts  when  business  slows  down.  Such  a  currency 
is  said  to  respond  to  the  needs  of  business.  When  buyers  are 
active  and  anxious  to  buy  a  great  deal,  this  kind  of  a  currency 
gives  them  the  means  of  buying.  When  buying  is  inactive 
and  buyers  are  not  trying  to  buy  much,  they  do  not  need  so 
much  money,  and  it  should  therefore  decrease  in  quantity. 
It  is  commonly  assumed  that  this  adjustment  of  the  supply  of 
money  to  the  demand  for  it  is  desirable.  It  is  not  improbable 
that  over  long  periods  of  time  more  business  will  be  done,  with 
less  inconvenience  and  friction,  when  the  currency  behaves  in 
this  way  than  when  it  behaves  otherwise.  It  enables  people  to 
"make  hay  while  the  sun  shines,"  to  "get  while  the  getting  is' 
good,"  etc.,  but  it  also  forces  them  into  periods  of  inaction  and 


MONEY  393 

business  stagnation.  In  short,  this  sort  of  elasticity  in  the  cur- 
rency increases  business  activity  when  it  is  active  and  retards  it 
when  it  slows  down.  The  policy  outlined  in  the  preceding  pages 
would  do  the  opposite ;  that  is,  it  would  retard  business  activity 
when  it  was  active  and  stimulate  it  when  it  showed  a  tendency 
to  slow  down.  It  is  a  question  whether  this  is  not  a  better 
kind  of  elasticity. 

As  to  the  actual  methods  by  which  credit  currency  can  be 
made  to  decrease,  or  kept  from  increasing  when  business  is 
very  active,  an  easy  but  not  very  effective  method  is  that  of 
changing  the  rate  of  bank  discount.  When  business  is  active 
and  the  demand  for  bank  credit  keen,  the  banks  would  natu- 
rally, if  they  were  permitted  to  follow  their  own  interests,  raise 
their  rates  of  discount,  which  means,  virtually,  that  they  would 
charge  a  higher  rate  of  interest  on  their  loans.  This  would 
have  the  effect  of  discouraging  borrowing  and  reducing  the 
use  of  bank  credit  below  what  it  would  be  if  rates  were 
low.  Again,  when  business  is  inactive  and  the  demand  for 
loans  decreases,  the  tendency  is  to  lower  the  discount  rates 
or  to  lend  bank  credit  on  easier  terms.  The  Bank  of  England, 
for  many  years  before  the  World  War,  exercised  great  control 
over  the  monetary  situation  by  pursuing  this  simple  policy. 
Our  Federal  Reserve  Banks  have  performed  the  same  function 
to  a  certain  extent,  though  sometimes  interfered  with  by  the 
mistaken  policy  of  the  Secretary  of  the  Treasury. 


CHAPTER  XXVIII 
BANKING 

Promises  to  pay.  Where  business  is  done  on  the  basis  of 
voluntary  agreement  among  free  citizens  it  is  probable  that 
many  kinds  of  agreement  will  be  made.  Among  these  many 
forms  there  will  probably  be  promises  to  pay  money  or  to  de- 
liver some  desirable  object  at  some  future  time.  In  order  that 
such  promises  may  be  accepted,  one  or  both  of  two  conditions 
must  exist.  First,  and  most  important,  the  receiver  of  a 
promise  may  have  confidence  in  the  maker  of  the  promise,  both 
as  to  his  honesty  and  his  ability  to  fulfill  his  promise.  Second, 
the  receiver  of  the  promise  may  have  confidence  in  the  power 
and  the  willingness  of  the  government  to  compel  the  maker  of 
the  promise  to  keep  it.  Unless  one  or  both  of  these  forms  of 
confidence  should  exist,  promises  to  pay  are  not  likely  to  have 
much  value  or  to  be  accepted  widely. 

Need  of  institutions  to  deal  in  promises  to  pay.  In  all  coun- 
tries where  confidence  exists  (that  is,  where  men  are  generally 
honest  and  governments  reasonably  efficient)  these  promises 
come  to  play  a  large  part  in  free  and  voluntary  exchange.  The 
mass  of  such  promises  and  the  habit  of  dealing  in  them  have 
come  to  be  called  the  system  of  credit.  The  most  common  of 
these  promises  are  promises  to  pay  money.  So  common  have 
they  become,  and  there  is  so  large  a  volume  of  them,  that 
they  call  for  special  institutions  or  business  establishments  to 
deal  in  them.  These  establishments  are  now  called  banks.  The 
term  "bank"  originally  meant  the  bench  before  which  the 
money  changer  sat,  with  his  coins  stacked  up  before  him. 
When  he  failed  in  business  his  bench  was  broken  up,  hence 
the  word  "  bankrupt." 

394 


BANKING  395 

Receiving  deposits  and  making  loans.  The  original  business 
of  the  bank  was  ostensibly  to  deal  in  money,  but  out  of  this 
has  grown  the  business  of  dealing  in  credit  or  promises  to  pay 
money.  Lombard  Street  became  the  banking  center  of  Lon- 
don, from  the  fact  that  it  was  occupied  by  goldsmiths  from 
Lombardy.  They  had  to  have  safes  to  store  their  valuables. 
During  the  turbulent  times  of  the  sixteenth  and  seventeenth 
centuries  certain  worthy  Londoners  used  to  deposit  not  only 
their  valuables  but  their  money  with  these  goldsmiths  for 
safe-keeping.  Having  so  much  money  on  hand,  the  goldsmiths 
began  gradually  to  lend  out  small  sums,  always  taking  precau- 
tions to  keep  enough  on  hand  to  meet  the  demands  of  depositors 
whenever  they  were  presented.  This  business  of  receiving  de- 
posits and  making  loans,  which  is  the  essence  of  all  banking, 
eventually  became  more  lucrative  than  the  trade  of  the  gold- 
smith. More  and  more,  therefore,  they  gave  up  their  original 
trade  and  became  dealers  in  money  and  credit ;  that  is,  receiv- 
ing deposits  and  making  loans.  These  two  things  are  still  the 
fundamental  purposes  of  a  bank.  The  depositors  came  to 
recognize  the  legitimacy  of  this  business,  and  it  became  respect- 
able and  well  established  and  is  now  one  of  the  most  important 
of  all  forms  of  business. 

Elements  of  safety.  When  a  bank  has  many  depositors  to 
whom  it  owes  money  and  many  borrowers  who  owe  it  money,  it 
is,  if  properly  managed,  a  safe  business  for  all  concerned.  The 
depositors  to  whom  the  bank  owes  money  are  not  likely  to 
want  it  all  at  once.  All  the  bank  has  to  do  is  to  see  that  it 
has  in  its  vaults  every  day  a  little  more  money  than  its  deposi- 
tors are  at  all  likely  to  want  on  that  day.  When  the  bank  is 
properly  managed,  its  promises  to  its  depositors  are  always 
good,  and  the  depositors  can  always  get  their  money  when  they 
want  it.  At  the  same  time  all  the  promises  to  pay  which  it  has 
received  from  borrowers  are  always  good,  and  the  borrowers 
will  pay  back  the  money  the  day  it  is  due. 

In  order  to  understand  how  a  depositor  is  safeguarded,  it  is 
necessary  to  go  a  little  more  into  detail.  In  the  case  of  a  state 


396  PRINCIPLES  OF  NATIONAL  ECONOMY 

bank,  all  the  property  of  the  bank  is  ultimately  available  for 
the  payment  of  the  depositors ;  that  is,  if  the  affairs  of  the  bank 
are  wound  up,  every  depositor  must  be  paid  in  full  before 
the  owners  or  shareholders  get  anything  out  of  it.  In  the  case 
of  a  national  bank  the  bank  notes  which  it  has  issued  take 
precedence,  but  these  are  secured  by  special  forms  of  prop- 
erty (such  as  government  bonds  and  other  securities)  which 
it  has  deposited  with  the  Federal  Reserve  Board.  All  the 
other  property  of  the  bank  is  then  available,  as  in  the  case 
of  the  state  banks,  for  the  payment  of  the  depositors.  In  ad- 
dition to  this,  each  shareholder  may  be  assessed  an  amount 
equal  to  the  par  value  of  his  shares  in  order  to  pay  deposi- 
tors. Thus  the  shareholders,  or  owners,  may  lose  all  that  they 
originally  put  into  the  business,  plus  an  equal  amount,  before 
any  depositor  can  lose  anything.  This  makes  the  depositor 
relatively  safe. 

Reserves.  Let  us  now  see  in  what  the  property  of  the  bank 
consists.  In  the  first  place,  there  is  what  is  called  the  reserve. 
This  consists  either  in  cash  on  hand  or  in  part  cash  on  hand 
and  part  deposits  in  the  Federal  Reserve  Bank.  This  reserve 
is  required  to  bear  a  certain  ratio  to  the  total  cash  obligations 
of  the  bank,  and  in  normal  times  is  always  ample.  It  is  obvi- 
ous, however,  that  if  an  abnormally  large  number  of  depositors 
were  to  demand  payment  at  the  same  time  this  reserve  would 
be  exhausted  ;  that  is  to  say,  the  bank  would  have  no  cash  left. 
Unless  the  bank  could  get  extra  supplies  of  cash,  depositors 
would  then  have  to  wait  until  some  of  the  other  property  of 
the  bank  could  be  turned  into  cash. 

This  other  property,  however,  is  mainly  in  the  form  of  loans 
of  various  kinds  and  would  be  ample  unless  there  had  been 
fraud  or  bad  management.  Since  most  of  these  are  short-time 
loans,  they  are  being  paid  from  day  to  day,  and  cash  is  rapidly 
flowing  in.  Normally  this  would  replenish  the  cash  reserve  in 
a  few  days.  In  fact,  the  bank  can  usually  call  loans  in  rapidly 
enough  to  keep  its  cash  from  being  exhausted  even  by  an 
abnormal  demand.  In  addition  to  these  short-time  loans,  there 


BANKING  397 

are  usually  a  few  long-time  loans  and  other  securities.  If  these 
are  exhausted  and  the  affairs  of  the  bank  have  to  be  wound  up, 
the  real  estate  and  office  fixtures  may  be  sold.  If  these  are  not 
enough  the  owners  of  the  bank  may  be  assessed,  as  indicated 
above,  in  order  further  to  safeguard  the  depositors.  In  short, 
nothing  except  fraud  or  bad  management  could  cause  a  deposi- 
tor to  lose  any  portion  of  his  deposit. 

Making  money  more  active.  While,  as  stated  above,  the  es- 
sential work  of  a  bank  is  to  receive  deposits  and  make 
loans,  by  doing  these  things  it  performs  certain  important  func- 
tions in  the  national  economy.  One  of  these  functions  is  to 
take  money  which  would  otherwise  have  remained  inactive  and 
put  it  to  work.  The  individual  who  has  a  fund  of  purchasing 
power  which  he  does  not  care  to  invest  for  the  time  being  may 
deposit  it  with  a  banker ;  someone  else  who  has  an  opportunity 
for  investment  (that  is,  for  the  active  use  of  capital)  may  go 
to  the  banker  and  borrow  it.  The  banker  is,  therefore,  the 
middleman  who  stands  between  the  one  who  has  money  to 
spare  for  which  he  has  no  immediate  need  and  the  one  who 
has  a  need  for  capital  which  he  does  not  possess.  Without  the 
banker  these  two  men  might  have  difficulty  in  finding  each 
other.  The  banker  at  least  saves  them  time  and  trouble.  It  is 
very  much  the  same  function  as  that  performed  by  any  other 
middleman.  The  producer  of  material  products  does  not  have 
time  to  peddle  his  goods  among  consumers,  and  the  consumer 
does  not  have  time  to  search  for  a  producer  who  has  for  sale 
exactly  what  he  wants  to  buy.  Both  go  to  the  merchant,  the 
one  to  sell  his  surplus,  the  other  to  buy  his  supplies.  The  mer- 
chant saves  both  of  them  the  trouble  and  earns  an  income  in 
return  for  the  service  which  he  performs. 

Savings  banks.  The  depositor  may  prefer  to  leave  his  money 
on  deposit  for  a  long  time  or  for  a  stated  time,  or  he  may 
prefer  to  deposit  it  on  condition  that  he  may  withdraw  it 
at  any  moment  when  it  suits  his  convenience  to  do  so.  The 
former  class  of  deposits  are  commonly  called  savings  deposits ; 
and  the  latter,  deposits  subject  to  check.  The  savings  banks 


398  PRINCIPLES  OF  NATIONAL  ECONOMY 

are  a  special  class  which  receive  savings  deposits,  whereas  the 
ordinary  commercial  bank  receives  deposits  subject  to  check. 

Trust  companies.  Trust  companies  were  originally  formed, 
as  their  name  implies,  to  act  as  trustees ;  that  is,  they  would 
take  care  of  valuable  papers,  such  as  mortgages  and  other 
securities,  collect  interest  on  them,  pay  obligations  when  due, 
execute  wills  and  bequests,  handle  estates  for  people  who  needed 
or  desired  to  be  relieved  of  the  work,  and  perform  a  great 
many  other  similar  tasks.  In  the  course  of  this  work  they 
naturally  had  to  handle  a  great  deal  of  money.  At  one  time 
they  kept  this  money  in  regular  banks,  but  in  recent  times  they 
have  generally  kept  it  in  their  own  vaults  or  have  loaned  a 
part  of  it  on  ordinary  commercial  loans.  This  means  that  they 
have  been  doing  a  regular  banking  business  in  addition  to  the 
business  of  a  trust  company  as  originally  conceived.  In  fact, 
it  is  not,  at  the  present  moment,  easy  to  distinguish  a  trust  com- 
pany from  any  other  commercial  bank. 

Origin  of  the  bank  check.  Originally,  when  a  depositor  who 
had  money  in  a  bank  wished  to  make  a  payment  to  another 
person,  it  was  necessary  for  the  depositor  to  withdraw  his 
money  from  deposit  and  hand  it  to  the  payee.  A  little  later 
the  custom  grew  up  of  going  in  person  to  the  bank  and  authoriz- 
ing the  bank  to  transfer  a  certain  sum  from  the  payer's  to  the 
payee's  account.  The  payee  could  then  draw  out  the  money 
as  he  needed  it.  From  this  it  was  an  easy  step  to  the  custom  of 
giving  the  bank  a  written  order  to  pay  a  certain  sum  to  another 
»  person.  This  written  order  became  known  as  a  bank  check. 
These  checks  proved  so  convenient  that  they  became  one  of  the 
principal  means  of  making  payments.  A,  who  wishes  to  pay 
money  to  B,  merely  hands  a  check  to  B, — a  written  order  on 
the  bank.  B  may  then  withdraw  the  money,  or  he  may  deposit 
the  check  and  have  the  sum  transferred  from  the  payer's  account 
and  credited  to  his  own  account,  or  he  may  indorse  the  check 
and  pass  it  on  to  a  third  person.  This  third  person  may  pass  it 
on  to  a  fourth,  and  so  on  almost  indefinitely.  Sooner  or  later, 
however,  some  individual  who  receives  the  check  will  deposit  it 


BANKING  399 

with  his  own  bank.  If  it  happens  to  be  the  same  bank  on  which 
it  was  originally  drawn,  the  matter  of  transferring  the  account 
is  very  simple  ;  if  it  happens  to  be  another  bank,  and  there  hap- 
pen to  be  a  great  many  banks  in  the  same  business  center,  each 
one  receiving  in  the  course  of  the  day's  business  a  great  number 
of  checks  on  all  the  others,  a  somewhat  complicated  problem  is 
certain  to  arise.  This  is  the  problem  of  bank  clearings.  A  bank 
draft  is  merely  a  check  on  one  bank  drawn  by  another  bank.  A 
certified  check  is  a  private  check  to  which  the  bank  on  which  it 
is  drawn  certifies  or  the  payment  of  which  it  guarantees. 

The  clearing  house.  The  vast  increase  in  the  use  of  bank 
checks  in  the  making  of  payments  long  ago  created  the  neces- 
sity for  a  special  institution  known  as  the  clearing  house.  At 
the  close  of  each  day's  business  every  bank  in  a  large  commer- 
cial center  finds  itself  in  possession  of  a  number  of  checks  on 
each  of  the  other  banks.  Originally  messengers  were  sent  the 
rounds,  carrying  bundles  of  checks.  This  was  both  a  cumber- 
some and  an  expensive  process.  In  order  to  save  time  and 
shoe  leather  these  messengers  formed  the  habit  of  meeting  at 
certain  places  at  certain  hours  and  exchanging  their  bundles  of 
checks,  keeping  records  of  all  such  transactions.  By  this  simple 
process  the  messenger  from  one  bank  would  receive  all  the 
checks  on  his  own  bank  from  the  messengers  from  the  other 
banks,  and  at  the  same  time  he  would  deliver  to  the  messengers 
from  each  of  the  other  banks  the  checks  on  their  respective 
banks  deposited  with  his  bank. 

From  this  it  was  an  easy  transition  to  the  organization  of  a 
regular  clearing  house,  which  eventually  became  the  heart  of 
the  whole  financial  district.  The  late  Charles  F.  Dunbar  de- 
scribes the  process  as  follows : x 

This  medium  of  payment  acquires  great  perfection  wherever  the 
clearing-house  system  is  adopted.  Under  this  system  there  is  a  daily 
meeting  of  clerks  representing  all  the  banks  carrying  on  business  at 
any  common  center.  Every  bank  there  turns  in  at  a  central  office 

1The  Theory  and  History  of  Banking  (third  edition,  enlarged  by  Oliver 
M.  W.  Sprague).  G.  P.  Putnam's  Sons,  New  York  and  London,  1917. 


400  PRINCIPLES  OF  NATIONAL  ECONOMY 

all  the  checks  and  cash  demands  which  it  holds  against  others,  and 
is  credited  therewith,  and  is  also  charged  with  all  checks  and  demands 
brought  against  it  in  like  manner  by  others.  The  checks  and  de- 
mands which  have  thus  been  credited  to  and  charged  against  each 
bank  are  then  summed  up,  and  the  balance  found  to  be  owed  by  or 
due  to  each  bank,  as  the  case  may  be,  it  then  pays  to  or  receives  from 
the  central  office  in  money.  By  this  means  a  great  mass  of  trans- 
actions, which  would  otherwise  require  a  series  of  demands  by  each 
bank  upon  every  other  in  the  same  place,  are  settled  at  once,  and  the 
transportation  of  large  sums  in  cash  from  one  bank  to  another  is  to 
a  great  extent  dispensed  with. 

The  bank  deposit,  circulated  by  means  of  checks,  is  the  most  con- 
venient medium  of  payment  yet  devised.  A  stroke  of  the  pen  trans- 
fers it  *in  whatever  amount  is  needed  for  the  largest  transaction,  and 
this  transfer  instantly  becomes  the  basis  for  fresh  operations,  with 
as  complete  security  against  accidental  loss  as  can  be  imagined.  In 
the  strict  economic  sense  this  medium  no  doubt  has  rapidity  of  cir- 
culation in  a  high  degree,  while  in  the  sense  of  actual  activity  of 
movement  in  a  given  time  it  far  outstrips  money  or  notes,  and  has 
been  well  said  to  be  the  most  volatile  of  all  the  mediums  of  exchange. 
Of  the  entire  circulating  medium  of  this  country,  it  forms  incom- 
parably the  greatest,  although  the  least  considered,  part.  Depending 
for  its  efficiency  solely  upon  convention,  it  for  the  most  part  eludes 
the  regulations  which  legislatures  so  industriously  enforce  upon  the 
other  constituents  of  the  currency.  Indeed,  beyond  the  requirement 
of  a  minimum  reserve  made  by  the  law  of  the  United  States,  and  of 
most  of  the  several  states,  we  may  say  that  the  subject  is  not  touched 
by  legislation,  in  this  country  or  elsewhere.  The  necessity  for  pay- 
ment in  specie  or  legal-tender  paper  upon  demand,  the  chief  safe- 
guard of  value,  is  the  result  of  general  provisions  for  the  payment  of 
debts  of  any  kind.  And  the  chief  assurance  against  excessive  ex- 
pansion on  the  part  of  any  single  bank  or  banker  is  given  by  the 
certain  demand  for  prompt  and  frequent  settlement  occasioned  by 
the  voluntary  establishment  of  the  clearing  house,  or  by  the  habits  of 
the  community,  but  not  by  law. 

Since  the  above  was  written,  the  Federal  Reserve  Act  has 
been  passed  and  the  Federal  Reserve  system  put  into  opera- 
tion in  the  United  States.  Dimbar's  description  of  the  essential 


BANKING  401 

methods  of  clearing  still  applies,  but  most  of  the  bank  clearings 
in  this  country  are  now  done  through  the  Federal  Reserve 
Banks.  The  clearing  house  is  essentially  a  banker's  bank,  where 
banks  make  their  payments  to  and  collect  their  obligations 
from  one  another  very  much  as  private  individuals  who  do 
business  with  the  same  bank  make  their  payments  to  and  col- 
lect from  one  another.  The  Federal  Reserve  Banks  are  now  in 
a  peculiar  sense  fitted  to  act  as  the  bank  for  the  member  banks, 
thus  taking  the  place  of  the  clearing  house. 

When  you  make  a  payment  to  someone  in  another  city  with 
whom  you  have  business  relations  or  who  knows  you  and  your 
solvency,  a  very  convenient  method  is  to  send  him  a  check  on 
your  own  local  bank.  He  will  then  present  your  check  to  his 
own  bank  for  collection.  His  bank  will  usually  credit  him  at 
once  with  the  amount  for  which  the  check  is  drawn  and  then 
send  the  check  through  a  regular  groove.  Usually  it  will  send 
the  check  to  the  Federal  Reserve  Bank  of  its  district,  and  this 
Federal  Reserve  Bank  will  send  it  either  to  the  bank  on  which 
it  is  drawn  or,  if  that  bank  is  in  another  district,  to  the  Federal 
Reserve  Bank  of  that  district,  which  will,  in  turn,  send  it  to 
the  bank  on  which  it  is  drawn.  When  the  check  gets  back  to 
you,  you  can  trace  its  course  by  the  indorsements  on  its  back. 
Sometimes  the  banks  find  it  necessary  to  charge  a  small  fee  for 
collecting  a  check  of  this  kind. 

Bank  checks  do  not  circulate  quite  so  freely  among  private 
individuals  as  money,  because  each  check  must  be  indorsed  by 
each  person  through  whose  hands  it  passes.  Therefore  a  check 
will  be  accepted  only  from  a  person  whose  'signature  is  known 
to  be  genuine.  Since,  however,  paper  money  circulates  without 
indorsement,  one  will  accept  it  from  a  stranger  or  a  known 
rogue  unless  one  has  reasons  for  suspecting  the  money  to  be 
counterfeit. 

Domestic  and  foreign  exchange.  This  habit  of  making  pay- 
ments by  means  of  bank  checks  has  extended  beyond  the  limits 
of  any  city  or  of  any  country.  Business  transactions  between 
cities  and  between  countries  are  carried  on  in  much  the  same 


402  PRINCIPLES  OF  NATIONAL  ECONOMY 

way.  This  necessitates  some  convenient  way  of  balancing  pay- 
ments from  one  city  to  another  and  from  one  country  to  an- 
other. The  one  method  is  known  as  domestic  and  the  other 
as  foreign  exchange.  If  a  man  in  one  city,  say  Chicago,  must 
pay  for  goods  which  he  has  bought  in  New  York,  and  another 
man  in  Chicago  is  to  receive  an  equal  amount  of  money  for  goods 
which  he  has  sold  to  someone  in  New  York,  it  would  be  much 
simpler  for  the  first  man  to  pay  the  second  man,  thus  canceling 
both  debts,  than  for  money  to  be  sent  both  ways.  Domestic 
exchange  is  merely  a  system  on  which  this  can  be  done  on  a 
large  scale  between  all  the  large  cities.  If  the  men  in  question 
live  in  different  countries  as  well  as  in  different  cities,  the  same 
problem  arises  and  is  complicated  by  the  difference  in  the  mone- 
tary systems  of  the  different  countries. 

It  will  frequently  happen  that,  for  a  time,  more  money  is 
owed  by  citizens  of  one  country,  say  the  United  States,  to 
citizens  of  another,  say  England,  than  is  owed  by  citizens  of 
England  to  those  of  the  United  States.  In  such  cases  the  debts 
do  not  exactly  cancel  one  another.  If  Americans  owe  more  to 
Englishmen  than  Englishmen  to  Americans,  there  is  said  to  be 
an  unfavorable  balance  of  trade  in  America  and  a  favorable  one 
in  England ;  that  is,  some  money  must  flow  from  America  to 
England  to  pay  the  balance  and  in  the  opposite  direction  if  the 
balance  of  trade  is  unfavorable  to  England  and  favorable  to 
the  United  States.  Rather  than  send  money  to  England,  when 
the  balance  is  against  us,  paying  the  cost  of  transportation  and 
losing  the  use  of  it  for  a  time,  those  Americans  who  owe  the 
money  will  try  to  find  others  who  have  money  coming  to  them 
from  England  and  will  even  offer  a  small  premium  for  bills  on 
England.  English,  or  sterling,  exchange  is  then  said  to  be  above 
par ;  that  is,  the  American  who  is  to  receive  an  English  pound 
can  sell  his  claim  for  a  little  more  than  $4.8665,  which  is  its 
par  value  in  American  money.  When  the  balance  is  the  other 
way  sterling  exchange  is  below  par ;  that  is,  the  man  who  has 
to  wait  and  get  his  money  from  England  will  sell  his  claim  for 
a  little  less  than  $4.8665  for  each  pound  sterling.  During  the 


BANKING  403 

World  War  the  English  people  had  nothing  to  sell  to  us  and 
much  to  buy  from  us.  The  balance  was  so  overwhelmingly 
against  them  as  to  exhaust  all  their  available  gold,  and  they 
could  not  make  any  payments  at  all  for  a  long  time.  The 
pound  sterling  naturally  fell  far  below  par,  as  it  must  in  all 
such  cases,  depending  on  the  probable  lapse  of  time  before  trade 
can  again  reach  a  normal  balance. 

Dealers  in  foreign  exchange  are  merely  middlemen  who  buy 
and  sell  these  obligations  between  countries.  The  man  who 
has  money  coming  to  him  from  another  country  does  not  have 
to  find  a  man  who  owes  the  same  amount  of  money  to  the  other 
country ;  he  merely  sells  his  claim  to  one  of  these  dealers. 
Similarly,  the  man  who  owes  money  to  another  country  does 
not  have  to  find  a  man  who  has  the  same  amount  coming  to 
him  from  the  same  country.  He  merely  goes  to  one  of  these 
dealers  and  buys  a  claim  to  cancel  his  own  obligation.  It  is 
largely  through  these  dealers  in  foreign  exchange  that  inter- 
national payments  are  made  with  very  few  shipments  of  money. 

Bank  notes.  Certain  banks,  such  as  national  banks,  have 
been  permitted  to  perform  the  special  function  of  issuing  bank 
notes  and  thus  providing  a  circulating  medium  which  answers 
the  purpose  of  money  if  it  is  not  itself  a  form  of  money.  These 
notes  have  circulated  from  hand  to  hand  in  all  respects  as 
money.  They  differ  from  the  notes  of  an  ordinary  individual 
in  that  they  pass  from  hand  to  hand  without  indorsement.  The 
note  of  an  individual  may  circulate  to  a  certain  extent,  but  the 
laws  and  customs  of  business  require  that  it  be  indorsed  by 
everyone  through  whose  hands  it  passes.  In  that  important 
respect  the  private  note  differs  from  money.  It  is  the  custom 
for  a  modern  bank  note  to  pass  from  hand  to  hand  in  full  pay- 
ment of  all  obligations  without  indorsement  and  without  any 
regard  to  the  honesty  or  credit  of  the  individual  who  offers  it 
in  purchase  of  a  commodity  or  in  payment  of  a  debt. 

The  Bank  of  England.  In  some  historic  cases  this  custom  of 
issuing  notes  has  grown  up  without  the  authority  of  the  govern- 
ment and  without  any  special  help  from  the  government,  precisely 


404  PRINCIPLES  OF  NATIONAL  ECONOMY 

as  the  custom  of  receiving  deposits  and  making  loans  has  arisen. 
In  most  modern  countries,  however,  where  bank  notes  are 
allowed  to  circulate,  they  are  not  only  authorized  by  law  but 
very  carefully  supervised  and  safeguarded.  The  Bank  of  Eng- 
land, for  example,  occupies  a  position  with  respect  to  the  British 
government  somewhat  similar  to  the  position  which  an  ordinary 
bank  in  this  country  occupies  with  respect  to  one  of  its  largest 
customers.  The  British  government  maintains  no  separate 
treasury  of  its  own,  but  deposits  any  surplus  money  which  it 
may  have  with  the  bank,  just  as  a  private  firm  deposits  its  sur- 
plus money  with  its  own  bank.  The  British  government  makes 
its  payments  by  orders  on  the  bank,  very  much  as  a  private  firm 
would  make  its  payments  by  check  on  its  own  bank.  When  the 
British  government  desires  to  borrow  money,  except  in  ex- 
traordinary cases,  it  has  generally  borrowed  through  its  own 
bank,  the  bank  merely  serving  as  the  agent  of  the  government 
in  this  respect. 

In  return  for  various  services  which  the  bank  has  performed, 
it  has  been  permitted  to  issue  bank  notes  up  to  a  certain  extent 
(£17,775,000)  secured  by  debts  of  the  government  to  the  bank 
and  to  keep  them  in  circulation  very  much  as  other  forms  of 
money  are  circulated.  Beyond  this  quantity  it  was  permitted 
to  issue  notes  only  under  the  most  rigid  restrictions.  All  its 
additional  notes,  in  normal  times,  are  virtually  warehouse  re- 
ceipts similar  to  our  gold  and  silver  certificates ;  that  is  to  say, 
for  every  note  issued,  an  equivalent  in  gold  has  had  to  be  de- 
posited with  the  bank.  These  notes  were  merely  conveniences 
to  the  general  public.  An  individual  who  did  not  wish  to  carry 
a  large  quantity  of  gold  could  take  it  to  the  bank,  deposit  it, 
and  get  notes  instead.  The  notes  are  issued  only  in  large  denom- 
inations. Since  the  outbreak  of  the  World  War  the  restrictions 
upon  the  issue  of  notes  have  been  removed,  so  that,  for  the  time 
being,  the  Bank  of  England  is  permitted  to  issue  notes  at  will. 

The  old  Bank  of  the  United  States.  In  this  country  the  old 
Bank  of  the  United  States  was  chartered  in  1791  for  twenty 
years.  A  new  charter  was  refused  in  1811,  and  it  went  out  of 


BANKING  405 

existence.  A  second  bank,  similar  to  the  first,  was  chartered 
in  1816,  to  run  for  twenty  years.  Both  these  banks  served 
much  the  same  purpose  as  the  Bank  of  England ;  that  is,  the 
United  States  Bank  was  in  a  sense  the  banker  of  the  Federal 
government.  It  went  out  of  existence,  however,  in  1836,  having 
failed  to  secure  a  new  charter,  partly  through  the  opposition 
of  President  Jackson. 

The  national  banking  system.  In  1863  the  foundation  of 
our  present  national  banking  system  was  laid  and  a  series  of 
national  banks  was  created,  partly  as  a  means  of  making  a 
market  for  the  bonds  which  the  Federal  government  was  offer- 
ing for  sale  in  order  to  get  money  with  which  to  carry  on  the 
Civil  War.  Any  bank  chartered  under  this  act  was  permitted 
to  deposit  bonds  of  the  United  States  with  the  Secretary  of  the 
Treasury,  and  in  return  for  these  deposits  it  was  permitted  to 
circulate  bank  notes  up  to  90  per  cent  of  the  value  of  the  bonds 
deposited.  Thus,  if  the  bank  failed,  the  government  had  pos- 
session of  enough  of  its  property  to  redeem  all  the  notes  which 
it  had  issued.  In  a  sense  the  bank  had  pawned  valuable  prop- 
erty (that  is,  government  bonds)  and  received  a  kind  of  pawn 
check  in  return.  These  "  checks,"  called  bank  notes,  it  was  per- 
mitted to  circulate.  This  is  essentially  the  characteristic  of  our 
bank  notes  to  the  present  day.  Subsequent  acts  have  made 
some  changes  in  the  system,  particularly  the  act  of  1908,  which 
permits  a  national  bank  to  deposit  certain  other  securities  be- 
sides United  States  bonds  as  a  basis  for  its  note  circulation. 

The  Federal  Reserve  system.  The  most  important  piece  of 
banking  legislation  in  this  country  since  the  National  Bank  Act 
of  1863  was  the  Federal  Reserve  Act  of  1913.  Under  this  act 
there  was  created  under  the  Treasury  Department  of  the  United 
States  a  Federal  Reserve  Board  consisting  of  five  members 
besides  the  Secretary  of  the  Treasury  and  the  Comptroller  of 
the  Currency,  charged  with  the  general  administration  of  the 
national  banking  system.  The  country  was  then  divided  into 
twelve  districts,  and  within  each  district  a  city  was  selected, 
to  be  called  a  Federal  Reserve  city.  The  cities  chosen  were 


406  PRINCIPLES  OF  NATIONAL  ECONOMY 

Boston,  New  York,  Philadelphia,  Cleveland,  Richmond,  At- 
lanta, Chicago,  St.  Louis,  Kansas  City,  Dallas,  and  San  Fran- 
cisco. In  each  of  these  cities  was  organized  a  Federal  Reserve 
Bank.  This  bank  was  to  be  the  central  bank  of  the  Federal 
Reserve  system  in  the  district  within  which  it  was  located.  All 
the  national  banks,  and  all  the  state  banks  which  wished  to  be- 
come national  banks,  by  coming  in  under  the  Federal  Reserve 
system,  were  to  become  member  banks  and,  in  a  sense,  tributary 
to  the  Federal  Reserve  Bank.  They  have  a  voice  in  the  control 
of  the  Federal  Reserve  Bank  of  their  own  district.  Each  mem- 
ber bank  is  required  to  subscribe  to  the  capital  of  and  to  keep 
all  its  required  reserves  on  deposit  with  the  Federal  Reserve 
Bank  of  its  district.  The  Federal  Reserve  Bank  thus  becomes, 
in  a  sense,  the  bank  of  the  member  banks  of  its  own  district. 
It  does  no  business  directly  with  private  individuals,  aside  from 
the  purchase  of  bills  of  exchange  in  the  open  market.  The 
Federal  Reserve  Banks  themselves  carry  on  their  clearing 
through  a  special  branch  of  the  Federal  Reserve  Board  in 
Washington.  This  may  be  called  the  bank  of  the  Federal 
Reserve  Banks. 

General  purposes.  The  general  purposes  of  the  Federal  Re- 
serve system  may  be  summarized  under  three  heads :  first,  the 
provision  of  a  general  and  well-organized  market  for  the  selling 
of  commercial  paper ;  second,  the  pooling  of  the  reserves  of 
existing  banks ;  third,  the  provision  of  an  elastic  currency.  The 
first  and  second  of  these  purposes  are  provided  for  partly  by 
the  requirement  that  each  member  bank  shall  keep  a  part  of 
its  funds  on  deposit  with  the  Federal  Reserve  Bank  of  its  dis- 
trict. In  return  for  this  the  Federal  Reserve  Bank  is  to  take 
commercial  paper  (that  is,  notes  and  other  promises  to  pay 
money  to  the  bank)  and  send  it  money  instead.  Thus,  an 
individual  who  wishes  to  borrow  money  from  the  bank  gives  it 
his  own  personal  note,  properly  secured.  When  the  bank  has  a 
large  batch  of  these  notes  and  other  obligations,  and  needs  more 
cash,  it  can  indorse  these  notes  and  "sell"  them  for  cash  to 
the  Federal  Reserve  Bank. 


BANKING  407 

An  elastic  currency.  The  purpose  of  providing  an  elastic 
currency  is  carried  out  in  the  plan  for  the  issuing  of  bank  notes. 
Two  classes  of  notes  are  provided  for  under  the  system :  first, 
Federal  Reserve  notes  and,  second,  Federal  Reserve  Bank 
notes.  The  Federal  Reserve  notes  are  issued  to  member  banks 
by  the  Federal  Reserve  Banks  in  return  for  securities  of  various 
kinds.  For  example,  when  a  member  bank  sends  in  a  batch  of 
personal  notes  and  other  obligations  and  asks  for  cash,  it  may 
get  its  cash  in  the  form  of  Federal  Reserve  notes.  These  notes 
are  issued  to  the  Federal  Reserve  Banks  themselves  by  a 
government  official  known  as  a  Federal  Reserve  agent.  Vast 
quantities  of  these  notes  have  been  issued,  especially  since  the 
entrance  of  the  United  States  into  the  World  War. 

Not  much  use  has  been  made  as  yet  (1921)  of  the  Federal 
Reserve  Bank  notes.  They  are  based  upon  government  bonds 
which  are  deposited  with  the  Treasury  Department,  just  as  is 
the  case  with  national  bank  notes. 

It  is  the  Federal  Reserve  notes,  rather  than  the  Federal  Re- 
serve Bank  notes,  which  give  elasticity  to  the  currency.  When 
business  is  active  and  the  member  banks  are  doing  a  large  lend- 
ing business  (that  is,  lending  a  great  deal  of  money  to  in- 
dividuals and  firms)  they  will,  of  course,  have  received  as 
security  many  personal  notes  and  other  obligations.  By  send- 
ing them  in  large  batches  to  the  Federal  Reserve  Banks  they 
get  large  quantities  of  Federal  Reserve  notes,  which  they  pro- 
ceed to  lend  out,  receiving  other  notes  and  obligations  in  turn. 
By  repeating  this  process  they  put  large  quantities  into  circula- 
tion when  money  is  needed  or  demanded.  When  the  lending 
business  is  slack  (that  is,  when  there  is  not  much  demand  for 
money)  fewer  of  these  notes  are  put  into  circulation.  Thus  the 
supply  automatically  adjusts  itself  to  the  demand.  It  is  still 
an  open  question,  however,  whether  this  does  not  increase 
rather  than  decrease  the  tendency  toward  overexpansion  of 
business  at  certain  times  and  business  depressions  at  other  times. 

National  and  state  banks.  A  national  bank  in  this  country 
is  any  bank  which  is  chartered  under  Federal  law  as  distin- 


408  PRINCIPLES  OF  NATIONAL  ECONOMY 

guished  from  state  law.  With  the  exception  of  the  first  and  sec- 
ond Banks  of  the  United  States,  of  the  banks  chartered  under 
the  National  Bank  Act  (referred  to  above),  and  of  those  organ- 
ized under  the  present  Federal  Reserve  system,  all  banks  in  the 
United  States  are  chartered  under  state  laws  and  are  therefore 
state  banks.  Before  the  Civil  War  many  state  banks  issued  bank 
notes.  In  many  of  the  states  the  regulation  and  inspection  were 
very  inadequate,  and  the  state  banks  were  permitted  to  issue 
notes  which  they  could  not  redeem ;  that  is,  for  which  they  could 
not  exchange  lawful  money  when  they  were  presented.  These 
came  to  be  known  as  wildcat  banks.  Since  the  establishment  of 
the  national  banking  system  during  the  Civil  War  the  privilege 
of  issuing  bank  notes  has  been  reserved  for  banks  chartered  and 
controlled  by  the  Federal  government ;  that  is,  for  national  banks. 

Agricultural  credit.  The  business  of  agriculture  has  been 
the  slowest  of  all  to  make  a  large  use  of  credit.  One  reason 
has  been  the  lack  of  machinery  designed  to  provide  the  farmers 
with  the  kind  of  credit  which  they  have  needed,  as  the  ordi- 
nary banks  have  provided  the  merchants  and  manufacturers 
with  the  kind  which  they  have  needed.  The  farmer  needs 
comparatively  little  short-time  credit,  as  the  merchant  and 
manufacturer  understand  that  term.  The  bank  which  does 
a  regular  check  and  deposit  business,  whose  deposits  are  con- 
tinually being  withdrawn  and  replenished,  must  keep  its  assets 
in  liquid  form.  Farm  mortgages  are  notoriously  hard  to  dis- 
pose of,  and  no  commercial  bank  would  feel  safe  if  it  loaned  a 
large  proportion  of  its  deposits  out  on  that  kind  of  security. 

Enlarged  demand  for  capital.  It  was  the  mechanical  inven- 
tor who,  more  than  anyone  else,  created  the  vast  opportunities 
for  the  use  of  capital  in  the  modern  world.  This  is  as  true 
of  agriculture  as  of  the  other  industries.  The  simple  tools  and 
equipment  with  which  farming  was  done  in  former  times  in- 
volved very  little  preliminary  outlay  in  order  to  begin  farming 
on  an  equality  with  other  farmers.  Such  implements  as  the 
farmer  could  not  make  for  himself  he  could  procure  at  a  low 
cost  from  local  mechanics.  In  old  countries  land  has  not  com- 


BANKING  409 

monly  been  a  matter  of  merchandise,  and  there  was  therefore 
little  occasion  for  the  farmer  to  invest  heavily  in  land.  Not 
having  to  invest  heavily  either  in  land  or  equipment,  he  re- 
quired little  financial  aid.  In  the  United  States,  where  land  has 
been  regarded  as  a  salable  commodity,  it  remained  so  cheap 
until  quite  recent  times  as  to  call  for  no  heavy  outlay  on  the 
part  of  the  purchaser.  In  fact,  under  the  public  land  policy 
of  the  Federal  government  the  landless  farmer  could  become 
a  farm-owner  at  a  merely  nominal  price  or,  under  the  Home- 
stead Law,  without  money  and  without  price.  Under  such 
conditions,  when  farming  was  done  with  simple  and  inexpensive 
equipment  and  on  cheap  land,  the  problem  of  financing  the 
farmer  was  a  very  simple  one  and  did  not  call  for  a  special 
sort  of  financial  institution. 

Coming  of  agricultural  machinery.  Beginning  about  1830 
a  remarkable  series  of  mechanical  inventions  began  which 
brought  about  a  transformation  in  agriculture  somewhat  similar 
to  that  which  had  taken  place  in  manufacturing  a  half  century 
earlier.  They  did  not  transform  agriculture  from  an  industry 
of  small  into  an  industry  of  large  units,  as  happened  in  manu- 
facturing, but  they  did  transform  it  from  an  industry  in  which 
capital  had  played  a  negligible  part  to  one  in  which  it  was  to 
play  a  major  part.  Power-driven  farm  machinery  has  become 
not  only  expensive  but  so  very  efficient  that  no  farmer  can  now 
hope  to  succeed  without  it  in  competition  with  farmers  who  pos- 
sess it.  This  has  transformed  farming  into  a  capitalistic  indus- 
try and  the  farmer  into  a  small  capitalist.  Somewhat  earlier, 
however,  the  equipment  of  a  cotton  farm  had  required  a  consid- 
erable preliminary  outlay  because  of  the  prevalence  of  slavery 
and  the  high  cost  of  slaves.  It  is  the  necessity  for  a  large  prelim- 
inary outlay,  and  not  the  scale  of  production,  which  constitutes 
a  capitalistic  industry  and  creates  the  problem  of  financing  it. 

Rising  price  of  land.  Even  with  the  growing  cost  of  equip- 
ment the  problem  of  financing  the  farmer  did  not  become  so 
very  acute  until  about  the  beginning  of  the  present  century. 
So  long  as  there  was  good  farm  land  in  the  public  domain  to 


410  PRINCIPLES  OF  NATIONAL  ECONOMY 

be  had  for  nothing,  such  land  had  remained  cheap  in  all  parts 
of  the  country.  With  the  practical  exhaustion  of  desirable 
free  land,  other  lands  began  to  rise  rapidly  in  price.  Tenancy 
in  this  country  has  never  been  considered  as  other  than  tempo- 
rary and  abnormal.  The  average  American  farmer  has  always 
expected  to  own  his  farm  sooner  or  later,  tenancy  being  re- 
garded merely  as  a  transitional  state  from  that  of  farm  laborer 
to  that  of  farm-owner.  The  rapid  rise  in  the  price  of  land, 
however,  has  greatly  increased  the  difficulty  of  the  final  stage 
of  the  transition.  Prior  to  1890,  in  almost  any  part  of  our 
best  farming  area  a  month's  wages  of  a  farm  hand  was  equal  to 
the  price  of  an  acre  of  good  land.  At  the  present  time  (1921), 
in  spite  of  a  considerable  rise  of  farm  wages  it  will  take  at  least 
four  and  in  many  cases  eight  months'  wages  to  buy  the  same  acre. 

Increasing  difficulty  of  financing  the  farmer.  For  the  young 
and  landless  farmer  this  combination  of  expensive  equipment 
and  high-priced  land  has  presented  a  more  and  more  serious 
problem  in  recent  years.  Unless  he  has  been  able  to  get  the  per- 
sonal backing  of  some  individual  with  capital  to  spare,  he  has 
had  a  slim  chance  of  success.  Various  methods  have  been  re- 
sorted to.  Manufacturers  and  sellers  of  agricultural  machinery 
and  fertilizers  have  developed  an  elaborate  credit  system.  In 
many  cases  the  manufacturer  has  sold  to  the  country  dealer  on 
credit  and  he,  in  turn,  has  sold  to  the  farmer  on  credit.  Such 
credit,  however,  has  usually  been  for  a  relatively  short  time ; 
that  is,  for  the  growing-season.  A  multitude  of  small  country 
banks  have  sprung  up,  mainly  since  1900,  to  help  in  the  financ- 
ing of  such  farm  operations  as  can  be  completed  within  a 
growing-season,  or  a  year  at  the  outside.  A  characteristic 
operation  of  this  kind  is  found  where  a  bank  lends  a  corn 
farmer  money  with  which  to  buy  cattle  from  the  Western 
ranges,  which  cattle  the  farmer  fattens  with  his  own  corn  crop 
and  then  sells  to  one  of  the  great  slaughtering  establishments, 
paying  off  his  loan  with  a  part  of  the  proceeds. 

Long-time  credit.  The  greatest  difficulty,  however,  has  been 
presented  by  the  farmers'  need  for  long-time  credit.  When  a 


BANKING  411 

tenant  farmer  wishes  to  buy  a  farm  of  his  own  or  when  a 
landowning  farmer  wishes  to  make  permanent  and  expensive 
improvements,  if  he  needs  to  borrow  at  all,  it  will  usually  take 
a  period  of  years  to  repay  the  loan.  The  only  satisfactory 
security  he  can  offer  for  such  long-time  loans  is  a  mortgage  on 
the  farm.  But  the  market  for  farm  mortgages  has  been  a 
limited  one.  In  other  words,  comparatively  few  persons  are 
willing  to  accept  a  mortgage  as  security  for  money  loaned.  The 
reasons  are  rather  obvious.  One  must  be  a  good  judge  of  farm 
values  and  must  also  understand  the  legal  questions  connected 
with  mortgages  and  their  foreclosure  ;  otherwise  it  is  not  safe  for 
one  to  lend  on  mortgage  security.  These  reasons  are  especially 
strong  in  a  new  community  where  there  are  no  local  lenders 
and  where  loanable  money  must  be  secured  from  a  great  dis- 
tance. The  distant  lenders  are  not  in  a  position  to  know  much 
about  farm  values,  and  if  they  live  in  other  states  they  may  not 
know  much  about  the  local  statutes  governing  mortgages.  Such 
communities  have  for  these  reasons  always  had  difficulty  in 
getting  loans  on  favorable  terms. 

Private  agencies  for  financing  the  farm.  This  difficulty  had 
been  partially,  but  only  partially,  overcome  in  various  ways. 
A  local  agency,  either  individual  or  corporate,  knowing  local 
farm  values  and  other  conditions  would  accept  mortgages  and 
add  its  own  guaranty  to  increase  their  marketability  and  then 
sell  them  to  distant  investors.  Again,  certain  large  Eastern 
concerns,  such  as  insurance  companies,  would  send  their  own 
experts  to  selected  regions  to  inspect  farms  and  place  loans 
secured  by  farm  mortgages. 

Again,  a  number  of  large  corporations,  commonly  called 
mortgage  banks,  were  organized  to  lend  on  farm  mortgages 
and  to  sell  bonds  to  the  investing  public.  Such  a  corporation, 
having  "bought"  a  number  of  mortgage  notes  aggregating,  let 
us  say,  $100,000,  would  deposit  them  with  a  trustee, as  security 
for  its  own  bonds  to  the  amount  of  $100,000.  These  bonds 
would  then  be  sold  to  the  general  public.  The  investor  had  the 
advantage  of  buying  a  security  resting  on  the  entire  assets  of 


412  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  corporation,  including  the  mortgage  notes.  He  did  not  have 
to  know  the  value  of  any  individual  farm.  The  corporation 
itself  assumed  the  responsibility  of  properly  appraising  the 
property  against  which  it  held  mortgages. 

Federal  Farm  Loan  system.  In  order  to  extend  this  principle 
and  enable  it  to  meet  the  need  for  mortgage  credit  in  every 
part  of  the  country,  the  Federal  Farm  Loan  Act  of  1916  was 
passed.  Under  this  act  there  was  created  a  Federal  Farm  Loan 
Board  to  consist  of  the  Secretary  of  the  Treasury  and  four 
others  to  be  appointed  by  the  president,  and  to  have  general  ad- 
ministrative control  of  the  system.  Under  this  board  there  were 
created  twelve  Farm  Land  Banks,  located  in  twelve  different 
districts  into  which  the  country  was  divided,  each  bank  to  be 
the  center  of  the  Farm  Loan  system  for  its  own  district.  In 
each  district,  under  its  Farm  Land  Bank,  there  were  to  be 
organized  an  indefinite  number  of  Farm  Loan  Associations,  to 
be  composed  wholly  of  farmers  who  desire  to  borrow  money  on 
mortgage.  A  Farm  Loan  Association  borrows  money  from  the 
Farm  Land  Bank  of  its  district. 

The  following  diagram  will  illustrate  the  general  framework 
of  the  organization : 


FEDERAL  FARM  LOAN  BOARD 

(made  up  of  the  Secretary  of  the 

Treasury  and  four  others) 


FARM  LAND  BANK 
(of  which  there  are  twelve) 


FARM   LOAN  ASSOCIATION 
(an  indefinite  number) 


INDIVIDTAI,  FARMER 
(an  indefinite  number) 


BANKING  413 

The  twelve  Federal  Farm  Land  Banks  are  located  in  the 
following  cities:  Springfield,.  Mass.;  Baltimore,  Md.;  Colum- 
bia, S.  C.;  Louisville,  Ky.;  New  Orleans,  La.;  St.  Louis,  Mo.; 
St.  Paul,  Minn.;  Omaha,  Nebr.;  Wichita,  Kans.;  Houston, 
Tex.;  Berkeley,  Calif.;  Spokane,  Wash. 

There  was  also  a  provision  in  the  Federal  Farm  Loan  Act 
permitting  joint-stock  mortgage  banks,  such  as  were  described 
in  a  previous  paragraph,  to  come  in  under  the  Federal  Farm 
Loan  system  by  submitting  to  its  general  rules  and  regulations. 
A  large  number  of  such  mortgage  banks  have  taken  advantage 
of  this  provision,  there  being  twenty-five  on  February  15,  1921, 
with  capital  stock  of  $7,966,000,  with  bond  issues  aggregat- 
ing something  over  $76,000,000,  and  with  loans  to  farmers 
aggregating  almost  $78,000,000. 

On  December  31,  1920,  the  total  capital  stock  of  the  twelve 
Farm  Land  Banks  amounted  to  $24,591,515,  held  as  follows: 
by  the  United  States  government,  $6,832,680;  by  National 
Farm  Loan  Associations,  $17,663,725;  by  borrowers  through 
agents,  $79,230;  by  individual  subscribers,  $15,880. 

Total  amounts  loaned  by  the  twelve  Federal  Land  Banks  up 
to  November  30,  1920,  were  as  follows: 

Springfield $13,550,345 

Baltimore 14,732,783 

Columbia 20,406,515 

Louisville 27,691,200 

New  Orleans 25,811,705 

St.  Louis „. 30,951,675 

St.  Paul 49,554,700 

Omaha 48,905,890 

Wichita 3i,53i,3°o 

Houston 40,754,766 

Berkeley 18,645,900 

Spokane 46,084,535 

Total $368,621,314 

In  order  to  assure  a  sufficient  amount  of  capital  stock  it 
was  provided  that  in  case  the  total  $750,000  of  capital  stock 


414  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  any  Federal  Farm  Land  Bank  should  not  have  been  sub- 
scribed within  thirty  days  after  the  opening  of  the  books,  it 
should  become  the  duty  of  the  Secretary  of  the  Treasury  "to 
subscribe  the  balance  thereof  on  behalf  of  the  United  States." 
Still  further  to  assure  the  Farm  Land  Banks  a  working  capi- 
tal, in  case  the  public  should  be  slow  to  invest  in  the  Farm 
Land  Bonds,  amendments  were  passed  (January  18,  1918,  and 
May  26,  1920)  authorizing  the  Secretary  of  the  Treasury  to 
purchase  $2  00,000,000  of  such  bonds  during  the  years  1918, 
1919,  1920,  and  1921.  On  December  31,  1920,  the  United 
States  government  held  86,832,680  of  the  capital  stock  of  the 
Farm  Land  Banks.  On  the  same  date  the  Treasury  held  their 
bonds  to  the  amount  of  8182,235,000.  The  total  amount  of  the 
bonds  authorized  and  issued  by  them  was  $333,784,500. 

Under  the  operation  of  this  act  and  its  amendments  such 
moneys  as  are  secured  from  the  sale  of  bonds,  either  to  the 
Secretary  of  the  Treasury  or  to  the  investing  public,  are  loaned 
by  the  Farm  Land  Bank  to  Farm  Loan  Associations  within 
its  district  in  return  for  mortgages  given  by  individual  farmers 
to  these  Farm  Loan  Associations.  The  course  of  the  money  is, 
therefore,  as  follows :  first,  from  the  investor  to  the  Farm  Land 
Bank  in  exchange  for  bonds ;  second,  from  the  Farm  Land 
Bank  to  the  Farm  Loan  Association  in  exchange  for  a  batch  of 
mortgages ;  third,  from  the  Farm  Loan  Association  to  the  in- 
dividual farmer  in  exchange  for  an  individual  mortgage.  The 
securities,  however,  proceed  in  the  opposite  direction :  first,  a 
mortgage  is  given  by  the  individual  farmer  to  his  local  Farm 
Loan  Association  in  exchange  for  money  ;  second,  this  and  other 
similar  mortgages  are  transferred  from  the  Farm  Loan  Asso- 
ciation to  the  Farm  Land  Bank  in  exchange  for  money; 
third,  the  Farm  Land  Bank  deposits  these  mortgages  under 
the  direction  of  the  Federal  Farm  Loan  Board  and,  on  the 
basis  of  these  as  security,  issues  its  own  bonds  and  sells  them 
to  the  investors  for  money. 

Exemption  of  Farm  Land  Bonds  from  taxation.     It  was  pro- 
vided in  the  Farm  Loan  Act  that  the  bonds  of  the  Farm  Land 


BANKING  415 

Banks  were  to  be  exempt  from  taxation.  The  purpose  of  this 
exemption  was  to  make  such  bonds  so  attractive  to  the  general 
investor  as  to  compensate  for  a  low  rate  of  interest.  This  low 
rate  of  interest  on  the  bonds  would  then  enable  the  Farm  Land 
Banks  to  accept  farm  mortgage  notes,  paying  a  low  rate  of  in- 
terest, and  thus  the  farmer  would  be  able  to  borrow  his  money 
at  a  lower  rate  than  would  be  necessary  if  the  Farm  Land  Bonds 
were  subject  to  taxation.  Those  issued  prior  to  May  i,  1920, 
paid  4^  per  cent.  Subsequent  issues  pay  5  per  cent. 

This  provision  was  bitterly  attacked  on  the  ground  that  it 
was  class  legislation,  or  discrimination  in  favor  of  farmers  as 
against  other  classes.  The  matter  was  under  litigation  for 
many  months,  but  finally,  in  February,  1921,  the  Supreme  Court 
decided  in  favor  of  the  constitutionality  of  the  act.  Pending 
this  decision,  the  Farm  Land  Banks  had  been  unable  to  func- 
tion. The  effect  of  this  decision  will  undoubtedly  be  to  release 
them  and  permit  such  a  development  as  was  anticipated  by  the 
framers  of  the  plan.  It  is  the  belief  of  the  supporters  of  the 
plan  that  the  Farm  Land  Bonds  provided  for  under  this  act  will 
prove  a  popular  form  of  investment  and  become,  in  fact,  one  of 
the  leading  securities  on  the  investors'  markets  of  the  country. 


CHAPTER  XXIX 
MARKETING 

One  very  important  topic  under  the  general  subject  of  ex- 
change is  that  of  marketing.  This  has  to  do  with  the  actual 
process  of  finding  buyers  for  that  which  has  been  produced,  or, 
in  more  abstract  terms,  with  the  bridging  of  the  gap  which 
separates  producer  and  consumer. 

Essentials  of  successful  marketing.  There  are  four  essentials 
to  the  easy  and  successful  marketing  of  any  commodity.  In 
the  first  place,  it  must  be  of  good  quality ;  that  is,  of  the  quality 
which  is  desired  by  the  buyers.  In  the  second  place,  the  prod- 
uct must  be  so  graded  or  standardized  that  the  buyer  can  pur- 
chase it  without  inspection.  The  buyer  of  a  farm  product,  for 
example,  who  must  inspect  it  in  order  to  test  its  quality,  must 
necessarily  waste  a  great  deal  of  time  and  energy  in  the  process. 
Time  and  energy  are  expensive.  In  order  to  save  his  time  and 
do  a  large  business  at  the  minimum  labor  cost,  he  must  insist 
on  buying  such  products  as  have  been  graded  and  standardized 
so  that  he  can  order  by  grade  and  without  inspection.  In  the 
third  place,  the  product  must  be  in  some  way  stamped  or 
branded,  and  the  stamp  or  brand  must  be  safeguarded  as  care- 
fully as  a  banker  would  safeguard  his  signature  or  the  govern- 
ment its  seal.  Any  individual  or  association  which  permits 
inferior  or  ungraded  products  to  go  under  its  stamp  or  brand 
must  eventually  suffer  loss,  for  the  reputation  of  the  stamp  or 
brand  will  be  destroyed,  and  buyers  will  thereafter  place  no 
confidence  in  it.  In  the  fourth  place,  the  public  must  be 
educated  as  to  the  meaning  of  the  grades  and  standards  and 
the  stamps,  brands,  or  trade-marks,  in  order  that  it  may  be 
aware  of  the  desirability  of  buying  without  inspection  and  of 

the  possibilities  in  that  direction. 

416 


MARKETING  417 

Unless  the  producer  himself  will  undertake  to  do  these  four 
things  the  consumer  will  never  consent  to  buy  any  large  pro- 
portion of  the  product  directly.  The  consumer  will  insist  on 
saving  his  time,  even  at  the  loss  of  some  money  in  the  way  of 
higher  prices.  The  producer  will  not  be  able  to  get  the  ad- 
vantage of  these  higher  prices,  and  there  will  be  a  considerable 
spread  between  the  price  which  the  producer  gets  and  that 
which  the  consumer  pays.  This  spread  will  be  absorbed  by 
those  middlemen  who  buy  the  ungraded,  nondescript  products 
directly  from  the  producers,  in  a  form  in  which  the  consumers 
do  not  generally  want  them,  and  then  put  these  products  into 
such  forms  as  will  satisfy  the  consumers. 

Special  difficulties  in  marketing  farm  produce.  The  marketing 
of  farm  products  is  the  least  organized  and  probably  the  least 
efficient  part  of  our  whole  marketing  system.  This  is  probably 
inherent  in  the  very  nature  of  agricultural  production.  From 
the  standpoint  of  production  the  advantages  appear  to  be  very 
definitely  on  the  side  of  the  small  producer.  A  small  farmer, 
being  able  to  produce  more  economically  than  the  large  farmer, 
continues  to  hold  the  field.  But  he  is  at  a  peculiar  disadvantage 
in  the  marketing  of  his  own  products.  Even  if  he  were  able  to 
grade  and  standardize  his  products,  the  difficulty  of  educating 
the  public  to  the  meaning  of.  his  brand  would  be  insuperable. 
He  has  so  little  to  sell  that  the  cost  of  advertising  would  eat  up 
the  profits.  To  put  it  in  another  way,  the  public  would  soon 
become  bewildered  if  every  one  of  the  millions  of  farmers  of 
this  country  tried  to  create  a  special  market  for  his  own 
individual  products. 

From  the  standpoint  of  marketing,  the  bonanza  farmer  has 
a  great  advantage.  In  some  cases  (that  is,  in  the  production  of 
certain  agricultural  specialties,  such  as  fancy  fruits  and  vege- 
tables, breeding-animals,  and  race  horses)  this  advantage  in 
marketing  is  so  great  as  to  more  than  balance  the  disadvantage 
in  production.  This  is  probably  due  to  the  nature  of  an  agri- 
cultural specialty.  The  great  staple  crops,  on  which  the  world 
must  in  the  main  be  fed,  are  not  so  difficult  to  market  as  are 


4i 8  PRINCIPLES  OF  NATIONAL  ECONOMY 

specialties.  In  the  production  of  these  great  staple  crops  the 
advantage  will  remain  probably  on  the  side  of  those  who  can 
reduce  the  cost  of  production  to  the  minimum  rather  than  on  the 
side  of  those  who  can  market  most  effectively.  But  in  the  case 
of  agricultural  specialties,  where  marketing  is  more  difficult, 
the  advantage  will  remain  probably  on  the  side  of  those  who 
can  market  effectively  rather  than  on  the  side  of  those  who  can 
reduce  the  cost  of  production  to  the  lowest  point.  The  large 
producing  unit  can  do  its  own  grading  and  standardizing,  can 
adopt  its  own  trade-mark  or  brand,  and  can  advertise  more 
effectively  than  the  small  producing  unit.  This  will  probably 
keep  the  production  of  agricultural  specialties  in  the  hands 
of  large  producers,  at  least  for  some  time  to  come.  The 
only  chance  which  the  small  farmer  will  have  in  the  field  of 
agricultural  specialities  will  be  secured  through  cooperation. 

Cooperative  marketing.  It  will  be  observed  that  there  is  very 
little  cooperative  farming  in  this  country  or  anywhere  else. 
There  is  a  great  deal  of  cooperation  among  farmers,  especially 
in  European  countries ;  but  this  cooperation  is  really  coopera- 
tive marketing.  The  farm  as  a  productive  unit  is  managed  in- 
dependently and  separately,  but  the  products  of  a  great  many 
farms  are  marketed  cooperatively.  This  gives  the  double  ad- 
vantage of  economic  production* in  small  units  and  efficient 
marketing  in  large  units.  On  the  whole,  it  looks  like  an  ideal 
arrangement. 

The  superior  bargaining  power  of  the  trust.  This  distinction 
between  production  and  marketing  will  throw  light  on  certain 
problems  in  business  organization  outside  of  agriculture.  The 
so-called  trust  is  primarily  a  marketing  organization  rather  than 
a  producing  organization.  A  large  number  of  independent  com- 
panies, operating  independent  factories,  join  together  for  a 
common  management.  This  may  result  in  some  reorganization 
of  the  work  of  production,  but  in  the  main  it  works  a  reorgani- 
zation in  the  methods  of  selling  the  product,  of  buying  the  raw 
materials,  of  hiring  labor,  or  of  bargaining  for  transportation. 
It  is  probable  that  some  economies  are  introduced  into  produc- 


MARKETING  419 

tion,  but  even  if  no  economies  of  production  were  secured,  the 
trust  might  succeed  by  reason  of  its  superior  bargaining  power. 
If  by  reason  of  its  magnitude  and  the  perfection  of  its  organiza- 
tion it  can  bargain  for  better  transportation  rates  than  independ- 
ent producers  can  get,  it  may  defeat  them  through  competition. 
In  the  earlier  days  of  the  trust  movement  this  was  an  important 
factor  in  its  success.  Again,  if  the  trust  can  get  control  of  a 
source  of  raw  material  or,  through  its  organization,  can  bargain 
more  effectively  for  its  raw  materials,  it  likewise  has  an  ad- 
vantage over  its  independent  competitors.  Or  if  it  can  secure 
its  labor  on  better  terms  it  will  have  another  advantage.  In 
the  main,  however,  its  chief  advantage  lies  in  its  superior 
facilities  in  marketing.  Having  its  selling  organization  highly 
perfected  and  its  agents  everywhere,  it  can  profit  by  every 
possible  fluctuation  in  demand  and  thus  secure  a  legitimate 
advantage.  Unfortunately  it  is  able  also  to  manipulate  the 
market,  to  discriminate  in  prices  between  localities  as  well  as 
between  persons,  and  thus  to  gain  an  illegitimate  advantage 
over  its  independent  rivals.  The  advantages  of  the  huge  de- 
partment store  are  likewise  in  the  field  of  bargaining  rather  than 
in  the  field  of  productive  service. 

Social  advantages  of  a  good  marketing  system.  There  is  lit- 
tle danger  that  any  farmers'  association  will  ever  reach  a  mag- 
nitude or  a  perfection  of  organization  which  will  permit  it  to 
discriminate  in  prices  against  certain  localities  or  individuals. 
There  is,  therefore,  little  danger  that  it  will  ever  be  able  to 
secure  an  illegitimate  advantage.  It  may,  however,  reach  a 
magnitude  and  a  perfection  of  organization  which  will  enable 
it  to  take  advantage  of  whatever  fluctuations  the  market  shows 
and  thus  gain  a  legitimate  profit.  If,  for  example,  in  an  un- 
organized market  too  much  of  a  certain  kind  of  produce  should 
be  sent  to  one  city,  some  of  it  would  either  go  to  waste  or  be 
very  ineffectively  consumed ;  that  is,  be  used  for  unimportant 
purposes.  If  at  the  same  time  too  little  were  sent  to  another 
locality,  there  its  marginal  utility  would  be  high.  The  total 
supply  of  the  commodity  would  yield  more  satisfaction  if  it 


420  PRINCIPLES  OF  NATIONAL  ECONOMY 

were  redistributed.  A  community  which  was  oversupplied 
would  lose  very  little  by  having  its  supply  slightly  reduced ; 
whereas  a  community  which  was  undersupplied  would  gain  con- 
siderably by  having  its  supply  slightly  increased.  There  would 
thus  be  a  net  gain  to  society  through  the  redistribution.  A  large 
and  efficient  selling  organization  can  frequently  prevent  such  a 
bad  geographical  distribution  of  produce  and  thus  avoid  loss 
to  the  community.  In  so  far  as  it  achieves  this  result,  it  is 
rendering  a  valuable  service  to  the  nation  and  is  entitled  to 
profit  by  it. 

Standardization  a  government  function.  There  may  be  some 
questions  as  to  what  part  the  government  can  properly  take  in 
the  improvement  of  marketing  methods  and  facilities.  What- 
ever differences  of  opinion  may  exist  with  respect  to  other 
functions  of  government,  little  is  said  or  can  be  said  against 
coining  money  and  fixing  the  standards  of  weights  and  meas- 
ures. Though  these  two  functions  are  grouped  together  in  the 
same  clause  of  our  Federal  Constitution,  it  is  doubtful  whether 
it  is  generally  realized  how  close  is  the  logical  connection  be- 
tween them.  Both  result  in  great  economy  of  effort  in  the 
transfer  of  goods.  The  economy  involved  in  transferring  coined 
money  rather  than  uncoined  metal  is  apparent.  Coining  the 
metal  merely  enables  it  to  pass  from  hand  to  hand  without  the 
labor  of  inspection  ;  that  is,  without  weighing  it  to  determine  its 
quantity  and  without  testing  it  to  determine  its  quality.  It 
sells  (if  we  may  speak  of  selling  money)  on  grade  and  reputa- 
tion rather  than  on  inspection.  It  is  the  most  salable  of  all 
commodities,  and  the  fact  that  it  is  so  standardized  as  to  make 
inspection  unnecessary  on  the  part  of  the  buyer  has  a  great 
deal  to  do  with  giving  it  its  superior  salability.  By  the  same 
process  of  standardization  any  other  commodity  may  approach 
gold  coin  in  salability,  though  it  may  not  quite  reach  it.  At 
least  it  is  safe  to  say  that  whenever  it  can  be  sold,  entirely  on 
grade  and  reputation  and  absolutely  without  inspection  its 
salability  will  be  enormously  increased. 


MARKETING  42 1 

Standards  for  measuring  quantity.  A  short  step  is  taken  in 
the  direction  of  standardizing  other  commodities  when  the  state 
establishes  uniform  standards  for  determining  quantity;  that 
is,  when  it  fixes  the  standard  of  weights  and  measures.  With- 
out some  uniform  system  even  our  present  methods  of  selling 
would  be  much  more  clumsy  and  wasteful.  Every  buyer  would 
have  to  have  his  own  system  for  determining  the  quantity 
of  his  purchases.  This  falls  short,  however,  in  two  important 
particulars  of  what  is  accomplished  when  metal  is  coined  in  a 
modern  mint.  In  the  first  place,  the  government  actually  coins 
the  money  or  requires  it  to  be  coined  according  to  its  own  rules, 
whereas  in  other  cases  it  only  defines  the  units  of  measure- 
ment and  commands  conformity  to  its  definitions.  In  the  sec- 
ond place,  coins  are  standardized  not  only  as  to  quantity  but 
as  to  quality  as  well.  There  is  no  probability  that  any  govern- 
ment will  be  called  upon  to  do  that  which  would  be  analogous 
to  coining  money, — actually  put  up  other  commodities  in 
standardized  packages.  Something  is  to  be  said  in  favor  of 
fixing  standards  of  quality  as  well  as  standards  of  quantity. 

Need  for  standards  for  determining  quality.  The  reasons  for 
fixing  standards  of  quality,  wherever  it  can  be  done,  are  identi- 
cal with  those  for  fixing  standards  of  measuring  quantity.  They 
are  all  summed  up  in  the  superior  economy  of  buying  on  grade 
and  reputation  as  compared  with  buying  on  inspection.  The 
buyer  of  an  unstandardized  commodity  may  have  enough  con- 
fidence in  the  seller's  system  of  weights  and  measures  to  avoid 
the  necessity  of  weighing  and  measuring  for  himself,  but  he 
can  scarcely  avoid  the  necessity  of  inspecting  the  commodity 
in  order  to  determine  its  quality.  In  some  cases  the  determina- 
tion of  its  quality  is  easier  than  that  of  its  quantity,  but  in  other 
cases  it  is  not.  In  all  cases  where  quality  can  be  standardized, 
there  is  economy  of  effort.  So  far  as  buyers  can  be  saved  the 
trouble  of  inspection,  so  far  will  they  be  enabled  to  economize 
the  time  and  effort  involved  in  making  purchases  and  so  far 
also  will  the  salability  of  commodities  be  increased.  Whether 


422  PRINCIPLES  OF  NATIONAL  ECONOMY 

this  will  reduce  the  cost  of  getting  the  standardized  commodi- 
ties from  producers  to  consumers,  or  merely  enable  the  con- 
sumers to  use  their  time  more  advantageously  to  themselves, 
may  be  open  to  question,  but  the  ultimate  economic  effects  are 
much  the  same  in  the  two  cases. 

Need  of  expertness  in  buying  supplies.  Not  the  least  among 
the  advantages  of  a  minute  division  of  labor  is  the  fact  that 
each  individual  can  avoid  the  necessity  of  being  expert  in  many 
things  and  therefore  has  time  to  become  a  specialist  in  one 
thing.  One  of  the  advantages  of  the  standardization  of  com- 
modities is  that  the  average  consumer  can  avoid  the  necessity 
of  being  an  expert  judge  of  the  many  articles  which  he  has  to 
purchase.  He  may  therefore  utilize  his  time  and  mental  energy 
in  his  own  special  field  of  work.  There  is,  to  be  sure,  some- 
thing attractive  in  the  custom  of  the  well-to-do  burgher's  going 
to  market  and  selecting  with  the  eye  of  a  connoisseur  the 
various  articles  needed  by  his  household,  but  it  is  wasteful  of 
time  and  mental  energy.  When  he  or  his  housekeeper  is  able 
to  order  by  telephone,  without  any  inspection  whatever,  and 
still  get  what  he  wants,  more  time  is  left  for  other  things. 

This  will  help  to  explain  two  very  distinct  tendencies  in 
present-day  retail-marketing  methods.  The  first  is  to  put  up 
more  and  more  articles  in  standardized  packages.  The  second 
is  to  place  more  and  more  dependence  upon  the  retailer,  who, 
in  many  cases,  is  coming  to  regard  his  customers  as  clients  to 
whom  he  is  bound  to  give  his  own  expert  service.  Both  ten- 
dencies are  designed  to  save  the  consumer  the  trouble  of  be- 
coming an  expert  buyer  and  to  leave  him  more  time  for  other 
things.  Neither  tendency  has  as  yet  reduced  the  cost  of  getting 
products  from  producer  to  consumer.  If  the  consumer  utilizes 
the  time  saved  in  marketing  by  doing  work  which  earns  him  a 
larger  income  with  which  to  purchase  goods,  it  perhaps  does 
him  as  much  good  as  it  would  if  these  tendencies  merely 
reduced  the  price  of  commodities. 

Marketing  by  telephone  an  American  habit.  Marketing  by 
telephone  is  peculiarly  an  American  habit.  This  may  in  part 


MARKETING  423 

explain  and  in  part  be  explained  by  the  fact  that  two  thirds  of 
all  the  telephones  in  the  world  are  in  the  United  States  and 
three  fourths  of  them  are  in  the  United  States  and  Canada. 
This  habit  makes  it  more  and  more  difficult  for  the  householder 
to  inspect  her  purchases.  She  is,  therefore,  more  and  more 
driven  to  one  of  the  alternatives  mentioned  before.  She  must 
order  well-known  brands,  which  are  put  up  in  standardized 
packages,  trade-marked,  and  sold  on  grade  or  reputation,  or 
else  she  must  rely  on  her  grocer  or  her  marketman  very  much 
as  she  does  on  her  physician,  her  lawyer,  or  her  financial  ad- 
viser. The  quality  of  dependableness  becomes,  therefore,  more 
and  more  important  in  the  grocer  and  the  marketman.  Such 
qualities  have  to  be  paid  for.  Thus  the  householder  saves  time, 
but  pays  for  the  privilege. 

If  she  buys  standardized  goods  in  standardized  packages  she 
will  usually  pay  from  50  to  100  per  cent  more  than  she  would 
if  she  bought  in  bulk  and  did  her  own  inspecting  and  selecting. 
If  she  relies,  as  a  client,  upon  the  honesty  and  expertness  of 
her  grocer  and  her  marketman  she  must  pay  for  that.  Honest 
and  capable  experts  do  not  have  to  live  on  small  incomes  any- 
where, and  when  they  go  into  the  business  of  selling  produce 
they  will  charge  for  their  services. 

Standardization  should  take  place  early  in  the  marketing 
process.  One  reason  why  these  tendencies  merely  save  the  time 
of  the  consumer  instead  of  reducing  the  cost  of  getting  the 
products  to  him  is  that  the  standardization  takes  place  only  in 
the  last  stage  of  the  process ;  that  is,  just  before  the  com- 
modities reach  the  consumer.  In  order  to  reduce  materially 
the  spread  between  the  price  which  the  producer  gets  and  that 
which  the  consumer  pays,  standardization  must  take  place  early 
in  the  process.  This  will  enable  the  standardized  article  to  go 
through  the  channels  of  trade  at  a  lower  cost.  If  it  has  to  be 
inspected  every  time  it  changes  hands  the  process  is  expensive 
and  someone  must  pay  the  cost.  Some  products  apparently 
cannot  be  standardized,  so  there  must  always  be  a  wide  spread 
between  the  producers'  and  the  consumers'  prices. 


424  PRINCIPLES  OF  NATIONAL  ECONOMY 

A  good  illustration  of  the  effect  of  standardizing  a  product 
early  in  the  process  of  getting  it  from  the  producer  to  the 
consumer  is  found  in  the  marketing  of  certain  kinds  of  Western 
fruit.  They  are  graded  and  standardized  as  soon  as  they  leave 
the  orchards.  All  subsequent  inspection  is  therefore  unneces- 
sary and  the  cost  of  getting  them  to  the  consumer  is  reduced 
practically  to  the  physical  cost  of  haulage  and  handling.  This 
has  notably  reduced  the  spread  between  the  two  prices.  Many 
other  commodities,  such  as  wheat,  cotton,  pig  iron,  and  coal, 
are  sold  largely  on  grade  rather  than  on  inspection.  In  these 
cases  the  government  has  had  very  little  to  do  with  the  stand- 
ardization. Two  recent  acts  of  Congress,  however,  have  brought 
the  government  definitely  into  this  field  as  the  fixer  of  stand- 
ards of  quality.  These  are  the  Cotton  Futures  Act  and  the 
Grain  Standards  Act.  Both  give  the  Secretary  of  Agriculture 
power  to  establish  grades  and  to  enforce  their  use  in  the  regular 
channels  of  trade.  A  number  of  states  have  also  passed  grad- 
ing laws  of  various  kinds.  Four  New  England  states  have 
passed  a  uniform  apple-grading  law,  defining  the  contents 
of  a  standard  barrel,  describing  the  various  grades  of  ap- 
ples, and  imposing  penalties  upon  all  departures  from  the 
standard  prescribed. 

Such  legislative  acts  cannot  be  called  in  any  true  sense  inter- 
ferences with  trade.  They  are  designed  to  increase  the  freedom 
with  which  commodities  may  circulate.  They  are  somewhat 
analogous  to  the  work  of  the  traffic  policeman  on  a  crowded 
corner.  He  may  exercise  authority  and  interfere  occasionally 
with  an  individual's  movement,  but  the  result  of  his  so-called 
interference  is  greater  freedom  of  traffic.1 

Brands  and  trade-marks.  Brands,  trade-marks,  and  other 
selling  devices  of  this  general  description  would  be  useless  or 
impossible  without  some  kind  of  standardization  in  production 
or  grading  of  products.  Where  these  services  are  properly  used, 
they  are  an  aid  to  the  buyer  as  well  as  to  the  seller.  They 

1  Compare  the  article  by  the  author,  on  "  Standardization  in  Marketing,"  in 
the  Quarterly  Journal  of  Economics,  Vol.  XXXI,  No.  2,  pp.  341-344. 


MARKETING  425 

help  him  to  know  what  he  is  getting  and  enable  even  the 
inexpert  buyer  to  buy  safely. 

Advertising  and  salesmanship.  From  the  point  of  view  of  the 
seller  of  any  commodity  there  is  not  much  doubt  as  to  the 
efficacy  of  advertising  and  expert  salesmanship.  Serious  doubts 
have  been  expressed,  however,  as  to  the  social  advantage  of  what 
may  be  called  high-pressure  selling.  Why,  we  are  asked,  should 
we  be  subjected  to  all  the  arts  of  the  expert  salesman  and 
advertiser,  who  are  doing  their  utmost  to  persuade  us  to  spend 
our  money  for  things  which  we  do  not  need?  On  the  other 
hand,  it  is  replied,  why  should  not  every  art  of  persuasion 
known  to  the  expert  be  brought  to  bear  upon  men  to  lead  them 
to  do  what  they  ought  to  do  ?  This  is  what  evangelism,  moral 
leadership,  and  all  sound  instruction  amounts  to.  If  we  are  to 
allow  freedom  in  the  exercise  of  the  arts  of  persuasion  at  all, 
it  will  be  difficult  to  draw  the  line.  Who  shall  act  as  our  censor 
and  permit  one  man  and  forbid  another  to  persuade  people  to 
do  what  he  wants  them  to  do  ? 

Except  in  extreme  cases  this  argument  is  unanswerable.  In 
the  case  of  immoralacts,  or  any  act  which  the  moral  sense  of 
the  community  condemns,  it  is  obviously  as  immoral  to  per- 
suade people  to  commit  those  acts  as  it  is  to  commit  them.  If 
there  is  anything  which  men  clearly  ought  not  to  buy,  it  is 
equally  clear  that  men  ought  not  to  advertise  it  or  try  to  sell  it. 
But  the  difficulty,  except  in  extreme  cases,  is  to  decide  just 
what  things  it  is  proper,  and  what  it  is  improper,  to  buy. 

It  is  quite  clear,  however,  aside  from  all  questions  of  legal 
conduct,  that  much  of  our  advertising  is  a  waste  of  human 
energy.  Sometimes  it  is  a  service  to  a  consumer  to  apprise  him 
of  the  fact  that  he  can  buy  something  which  he  has  long  wanted 
and  to  tell  him  where  it  can  be  had.  In  most  cases,  however, 
advertising  serves  no  such  purpose.  One  does  not  need  an 
advertisement  to  apprise  him  of  the  fact  that  soap  can  be 
purchased.  The  only  purpose  served,  in  all  such  cases,  is  to  per- 
suade people  to  buy  one  brand  rather  than  another.  Our  help- 
lessness in  such  a  situation  is  revealed  to  us  when  we  consider 


426  PRINCIPLES  OF  NATIONAL  ECONOMY 

that  it  would  take  a  great  deal  of  campaigning,  accompanied  by 
advertising  and  high-pressure  persuasion,  to  work  up  a  public 
sentiment  hostile  to  advertising.  We  might  easily  waste  more 
energy  in  this  campaign  than  is  now  wasted,  in  advertising. 

Political  campaigning.  Socialists  are  in  the  habit  of  pointing 
to  the  wastefulness  of  advertising  as  one  of  the  costs  of  com- 
petition. They  do  not  point  out,  however,  that  a  political  cam- 
paign is  just  as  wasteful  as  a  selling  campaign.  The  candidate 
for  office  advertises  his  candidacy  and  uses  high-pressure  per- 
suasion to  get  people  to  vote  for  him.  Since  the  extension  of 
government  power  and  authority  would  multiply  government 
offices,  it  would  necessarily  multiply  the  number  of  campaigners 
and  greatly  increase  the  waste  of  time  and  energy  used  up 
in  political  campaigns.  Every  campaigner,  even  he  who  is 
campaigning  for  socialism,  is  doing  much  the  same  kind  of 
work  as  is  done  by  the  expert  advertiser.  He  is  using  high- 
pressure  persuasion  to  get  men  to  do  things  which  they  would 
otherwise  not  do. 

It  looks  as  though  we  should  have  to  regard  persuasion  in 
all  its  aspects,  except  persuasion  to  do  that  which  is  morally 
condemned,  as  a  necessary  cost  of  freedom.  A  despot  could 
suppress  all  persuasion,  in  politics  as  well  as  in  salesmanship, 
but  a  free  people  can  scarcely  get  along  without  it.  Freedom  is 
in  some  respects  costly,  but  it  is  worth  all  it  costs. 


CHAPTER  XXX 

ECONOMIC  CRISES 

Financial  crises.  One  of  the  most  important  and  most  puz- 
zling of  all  modern  economic  questions  is  that  of  the  frequent 
recurrence  of  financial  crises  and  general  industrial  depressions. 
A  financial  crisis  is  an  occasion  when  the  money  market  be- 
comes suddenly  demoralized,  confidence  disappears,  and  credit 
shrinks.  Everyone  to  whom  money  is  owed  wants  it  at  once, 
but  no  one  wants  to  let  go  of  any  money  in  his  posses- 
sion for  fear  that  he  may  not  be  able  to  get  any  more.  Be- 
sides, there  does  not  seem  to  be  money  enough  to  pay  off 
existing  debts. 

In  the  chapter  on  Banking  it  was  pointed  out  that  a  large 
part  of  the  business  of  the  world  is  done  on  credit,  without 
the  actual  handling  of  money.  If  you  will  imagine  a  group  of 
men  doing  business  with  one  another,  where  each  one  trusts 
every  other,  you  will  see  that  a  large  amount  can  be  done 
with  a  ridiculously  small  amount  of  money.  Many  transactions 
will  be  carried  on  by  means  of  promises  to  pay  money  in- 
stead of  with  the  money  itself.  Many  of  these  promises  will 
be  balanced  against  one  another  and  canceled  without  the  use 
of  any  money.  In  other  cases  the  money  will  be  used  merely 
to  pay  the  balances.  But  if  something  should  happen  to  destroy 
their  confidence  either  in  one  another  or  in  the  continuance 
of  prosperity,  the  maintenance  of  price  levels,  the  productivity 
of  labor,  or  anything  else  upon  which  business  depends,  so  that 
no  one  would  accept  promises,  but  everyone  demanded  real 
money,  there  might  not  be  money  enough  to  go  around  and 
make  the  necessary  payments.  In  that  case  business  would  have 
to  slow  down,  and  only  as  much  business  could  be  done  as  could 
be  transacted  with  the  small  amount  of  money  available.  If  in 

427 


428  PRINCIPLES  OF  NATIONAL  ECONOMY 

addition  to  this  everyone  held  on  to  all  the  money  he  could 
lay  hands  on;  for  fear  that  he  might  not  be  able  to  get  any  more, 
even  the  limited  amount  of  money  in  circulation  would  move 
slowly,  and  business  would  have  to  slow  down  correspondingly. 
A  swift  dollar  may  pass  from  hand  to  hand  many  times  in  a  day 
and  in  this  case  do  a  large  amount  of  business,  but  a  slow  dollar 
passes  from  hand  to  hand  only  a  few  times  a  day  and  does  a 
small  amount  of  business. 

Industrial  depressions.  An  industrial  depression  is  usually 
more  deep-seated  than  a  financial  crisis  and  usually  lasts  for  a 
longer  time.  It  is  a  general  stagnation  of  production  because 
of  inability  to  get  satisfactory  prices  for  products.  Various 
explanations,  some  intelligent  and  some  absurd,  have  been 
offered.  Overproduction  is  one  of  the  most  common  and  least 
intelligent.  There  may  be  such  a  thing  as  disproportionate  pro- 
duction, but  such  a  thing  as  general  overproduction  is  a  physical 
impossibility.  The  production  and  supplying  of  one  thing  is  a 
demand  for  something  else — the  more  production,  the  more 
demand ;  but  if  some  things  are  produced  and  offered  for  sale, 
and  there  is  no  demand  for  them,  it  means  either  that  those  few 
things  are  overproduced  or  that  the  other  things  which  might  be 
exchanged  for  them  are  underproduced. 

The  overproduction  theory.  One  phase  of  the  overproduc- 
tion theory  of  industrial  depression  is  that  wages  are  so  low 
that  the  laborer  is  not  able  to  buy  his  own  products.  It  is 
argued  that  this  results  in  an  overproduction  and  a  glut  on  the 
market.  There  are  many  excellent  reasons  why  wages  should 
be  higher  than  they  are,  but  this  is  not  one  of  them.  So  far  as 
its  effect  on  the  general  purchasing  power  of  the  community  is 
concerned,  it  makes  no  difference  whether  wages  are  high  and 
rent,  interest,  and  profits  are  low  or  whether  wages  are  low  and 
rent,  interest,  and  profits  are  high.  If  the  laborer  gets  a  small 
share  of  the  production  of  a  given  industry,  and  the  managers, 
landowners,  and  capitalists  get  a  large  share,  these  have  a 
large  purchasing  power  and  the  laborer  a  small  purchasing 
power.  The  value  of  the  whole  product  of  every  industry 


ECONOMIC  CRISES 


429 


goes  to  these  various  classes,  and  they  have  it  all  to  spend.  If 
one  class  possesses  a  large  share,  and  another  class  a  small 
share,  the  total  amount  to  be  spent  for  other  commodities  is 
not  affected  by  that  distribution.  If  the  laborers  get  absolutely 
the  whole  product  of  an  industry,  there  would  be  no  more  to 
spend  on  other  products  than  if  the  laborers  got  one  half  the 
product  and  the  other  participants  got  the  other  half.  This, 
let  is  be  repeated,  has  nothing  to  do  with  other  and  excellent 
reasons  why  wages  should  be  high. 

The  periodicity  theory.  A  certain  periodicity  has  been  ob- 
served in  the  recurrence  of  crises  and  depressions.  It  is  not 
always  easy  to  determine  just  the  interval  that  elapses  between 
depressions.  Sometimes  they  come  approximately  twenty 
years  apart,  but  they  have  a  disconcerting  habit  of  coming  at 
unexpected  times.  In  his  book  on  "Economic  Crises"  Jones 
gives  the  following  table:1 

LIST  OF  ECONOMIC  CRISES 


UNITED 
STATES 

ENGLAND 

FRANCE 

UNITED 
STATES 

ENGLAND 

FRANCE 

— 

1792-1793 

— 

l847 

1847 

I847 

— 

1796 

— 

— 

— 

1855 

— 

— 

1804 

1857 

I857 

I857 

— 

1810-181  i 

— 

— 

1866 

— 

1812 

— 

— 

1869 

— 

— 



— 

I8l3 

1873 

1873 

1873 



1815 

— 

— 

— 

1882 

1818 

— 

1818 

1884 

— 

1884-1885 

1825 

1825 

1825 

1890 

1890 

1890 

— 

— 

1830 

1893 

— 

1893 

1837-1839 

1836-1839 

1836-1839 

In  the  nineteenth  century  it  will  be  noticed  that  there  were 
severe  crises  in  1818,  1837,  1857,  with  lesser  crises  in  1825 
and  1847.  The  severe  crises  seemed  to  come  every  twenty 
years  for  almost  half  a  century.  Again,  there  were  severe  crises 


1  Edward  D.  Jones,  Economic  Crises.   The  Macmillan  Company,  New  York, 
1900. 


430  PRINCIPLES  OF  NATIONAL  ECONOMY 

in  1873  and  1893,  with  a  less  severe  one  in  1884.  Another  one 
occurred  in  1907. 

Various  attempts  have  been  made  to  explain  this  apparent 
periodicity.  The  late  William  Stanley  Jevons  developed  an  in- 
teresting theory  of  the  coordination  between  sun-spot  cycles 
and  industrial  depressions.  The  sun-spot  cycles,  he  argued, 
have  a  profound  effect  on  the  weather,  rainfall,  etc.,  and  these 
in  turn  affect  the  agricultural  basis  of  the  world's  wealth. 
This  theory,  however,  had  not  been  taken  seriously  by  the  econ- 
omists until  it  was  recently  revived  by  the  interesting  observa- 
tions of  Professor  Ellsworth  Huntington.  It  is  true  he  has  not 
developed  the  theory  at  great  length  as  applied  to  economic 
crises ;  but  he  had  presented  strong  evidence  in  favor  of  the 
doctrine  that  solar  disturbances  profoundly  affect  climatic  con- 
ditions and  rainfall,  and  that  these  in  turn  have  produced  great 
historical  and  economic  disturbances.1 

Meanwhile  the  question  Why  do  we  have  business  depres- 
sions? remains  unanswered,  and  it  is  now  being  asked  with  a 
new  insistence.  It  is  about  as  hard  to  answer  as  the  question 
Why  is  there  sickness  ?  There  are,  however,  a  few  things  that 
may  be  said  about  depressions  that  may  help  to  an  under- 
standing. In  the  first  place,  they  are  associated  with  free  buy- 
ing and  selling;  in  the  second  place,  they  are  associated  with 
the  free  use  of  credit;  in  the  third  place,  they  are  associated 
with  speculation. 

If  all  buying  and  selling  were  prohibited  and  industry  were 
carried  on  like  a  military  campaign,  everybody  working  under 
orders  and  receiving  his  rations  and  other  supplies  from  mili- 
tary stores,  there  would  be  no  industrial  depressions  of  the  kind 
we  now  know,  though  there  would  certainly  be  worse  things. 
If  we  decide  to  retain  the  system  of  free  buying  and  selling 
we  shall  always  run  the  risk  of  unevenness  or  irregularity  in 
the  rate  of  buying.  If  people  buy  at  irregular  rates,  there  must 

1  Ellsworth  Huntington,  "  Climatic  Changes  and  Agricultural  Exhaustion  as 
Elements  in  the  Fall  of  Rome,"  Quarterly  Journal  of  Economics,  February,  1917. 
See  also  "The  Pulse  of  Asia,"  Houghton  Mifflin  Company,  Boston,  1907. 


ECONOMIC  CRISES  431 

of  necessity  be  irregularity  in  the  business  of  merchandising 
and  producing.  Fads  and  fashions  alone  introduce  elements  of 
uncertainty  and  irregularity  into  the  buying  of  goods.  Be- 
sides, there  are  times  when  people  spend  their  money  more 
freely  than  at  other  times.  This  free  buying  at  one  time  and 
slow  buying  at  another  adds  a  further  element  of  uncertainty 
and  irregularity  and  makes  it  certain  that  business  will  be  more 
active  at  one  time  than  at  another. 

If  no  buying  were  ever  done  on  credit,  there  would  still 
be  some  irregularities  in  buying,  but  they  would  be  much  less 
frequent  and  less  extreme  than  when  credit  is  largely  used. 
People  might  spend  their  money  at  one  time  as  fast  as  they 
could  and  at  another  hold  on  to  it  a  little  longer,  yet  so 
long  as  they  are  spending  real  money  and  paying  cash  for 
what  they  get,  these  irregularities  will  not  be  so  very  great. 
But  when  men  suddenly  find  that  their  credit  is  good  and 
they  begin  buying  increasing  quantities  on  credit,  they  are, 
for  a  time,  spending  money  faster  than  they  get  it  or,  more 
accurately,  buying  goods  faster  than  they  can  pay  for  them 
or  faster  than  their  individual  incomes  will  warrant.  This 
accelerated  buying  makes  business  abnormally  active.  If  credit 
were  not  elastic,  and  men  were  making  practically  the  same  use 
of  credit  at  one  time  as  at  another,  buying  would  soon  settle 
down  to  a  normal  rate.  But  a  few  failures  will  tend  to  de- 
stroy confidence.  Men  find  that  they  cannot  buy  as  much  on 
credit,  or  they  grow  cautious  and  decide  not  to  make  use  of 
their  credit ;  and  this  results  in  abnormally  low  buying.  During 
this  period  even  those  whose  normal  incomes  have  not  been 
reduced  find  that  they  must  spend  less  than  their  total  in- 
comes for  new  goods,  being  compelled  to  spend  a  part  of  this 
year's  income  in  paying  for  goods  that  were  bought  last  year. 
This  means  that  they  must  of  necessity  spend  less  for  this 
year's  goods,  whereas  during  the  period  of  credit  expansion 
they  were  buying  more  than  their  incomes  would  warrant.  Dur- 
ing this  period  of  credit  contraction  they  cannot  buy  as  many 
new  goods  as  their  incomes  would  warrant  because  they  are 


432  PRINCIPLES  OF  NATIONAL  ECONOMY 

still  paying  for  old  goods.  This  makes  a  vast  difference  in 
business  activity. 

When  not  only  consumers  but  merchants,  manufacturers, 
farmers,  and  investors  are  buying  on  credit  and  expanding  their 
credit,  business  expands  at  an  astounding  rate ;  but  when  they 
all  stop  buying  new  commodities  in  order  to  pay  for  the  old 
ones,  there  is  no  demand  for  new  stuff  and  business  slows  down 
at  an  equally  astounding  rate. 

As  to  speculation,  when  prices  are  tending  upward  and  it  is 
the  belief  that  this  tendency  will  continue,  everyone  is  tempted 
to  speculate,  at  least  in  an  apparently  mild  and  harmless  way. 
If  there  is  something  that  we  shall  need  later  on  and  the 
price  is  likely  to  go  higher,  now  is  the  time  to  buy.  When  we 
act  on  this  impulse  we  accelerate  our  rate  of  buying,  for  a  time 
at  least,  and  this  tends  to  send  prices  still  higher,  this,  in  turn, 
tempting  us  to  still  more  speculation.  When,  however,  we  get 
stocked  up,  buying  comes  back  at  least  to  normal.  When 
prices  start  downward,  as  they  are  likely  to,  the  opposite  tend- 
ency shows  itself.  If  we  think  that  prices  are  going  to  be  lower 
we  have  a  reason  for  postponing  buying  and  for  not  only  using 
up  our  old  stocks  but  waiting  as  long  as  we  can  before  re- 
newing. This  results  in  an  abnormal  retardation  in  the  buying 
of  new  goods. 

When,  instead  of  this  mild  and  harmless  form  of  speculation, 
we  have  men  buying  large  quantities  of  commodities  for  the  sole 
purpose  of  selling  again  when  the  price  rises,  the  irregularities 
of  the  market  are  still  further  exaggerated.  When  prices  are 
going  up  every  speculator  wants  to  buy  and  no  one  wants  to 
sell.  This  excess  of  buyers  over  sellers  accelerates  the  rise  in 
prices.  When  prices  start  downward  every  speculator  is  a 
seller  and  no  one  wants  to  buy.  This,  in  turn,  accelerates  the 
fall  in  prices. 

We  may  be  able  to  repress  some  of  the  wilder  forms  of  specu- 
lation, but  it  is  difficult  to  see  how  we  can  prevent  those  who 
need  goods  from  buying  when  the  price  suits  them.  We  may 
be  able  to  restrict  somewhat  the  overexpansion  of  credit,  but 


ECONOMIC  CRISES  433 

it  is  difficult  to  see  how  men  can  be  prevented  from  buying  some 
things  on  credit,  provided  they  can  find  others  who  will  trust 
them.  Finally,  it  may  be  possible  to  restrict  somewhat  the  field 
of  free  buying  and  selling  and  to  enlarge  that  of  authority  and 
obedience,  but  it  is  difficult  to  see  how  all  buying  and  selling 
can  be  prevented.  We  may,  in  other  words,  find  ways  of 
decreasing  the  violence  and  frequency  of  business  depressions, 
but  we  cannot  eliminate  all  irregularities  of  demand  among  free 
buyers  and  sellers.  These  irregularities  of  demand  with  the 
resulting  irregularities  in  business  activity  are  among  the 
penalties  we  shall  have  to  pay  for  the  privilege  of  buying  what 
we  like  and  when  we  like  it. 

There  come  times,  however,  when,  for  reasons  but  vaguely 
understood,  a  veritable  fever  of  speculation  takes  possession  of 
a  community.  When  this  happens  the  prices  paid  for  the  arti- 
cles in  which  people  are  speculating  do  not  bear  any  logical 
relation  to  the  real  values.  The  speculator  will  pay  any  price 
for  anything,  provided  he  thinks  he  can  sell  it  later  at  a  still 
higher  price.  When  prices  are  tending  rapidly  upward  he  may 
rely  on  the  mere  momentum  to  carry  them  higher.  There  is 
only  one  possible  outcome  of  this  tendency — a  rapid  fall  in  the 
prices  of  the  commodities  in  which  men  are  speculating. 

Even  though  the  speculation  take  place  in  a  single  article,  it 
may  produce  a  profound  economic  disturbance.  The  money 
that  is  absorbed  in  the  speculative  purchasing  of  the  article  in 
question  is  necessarily  withdrawn  from  other  kinds  of  business. 
This  in  itself  produces  some  disturbance.  When  a  fall  in  prices 
begins,  a  general  bankruptcy  among  the  speculators  takes  place. 
When  a  number  of  men  become  bankrupt  and  are  unable  to  pay 
their  obligations,  a  process  begins  which  may  be  compared  to 
knocking  over  one  brick  in  a  row  of  bricks  standing  close 
together.  The  falling  of  one  brick  knocks  over  the  one  next  to 
it,  and  so  on  until  the  whole  row  falls.  Accordingly,  if  one  indi- 
vidual who  owes  money  to  another  fails  to  pay  his  debt,  the 
latter,  not  being  able  to  collect  his  money,  fails  to  pay  his  obli- 
gations to  a  third,  and  so  on ;  one  after  another  fails,  and  the 


434  PRINCIPLES  OF  NATIONAL  ECONOMY 

bankruptcy  spreads  throughout  the  community  in  a  sort  of 
wave  motion.  A  depression  always  follows  a  speculative  mania 
of  any  kind,  whether  it  be  a  real-estate  boom  or  a  boom  in  Short- 
horn cattle,  Belgian  hares,  or  French  bulldogs.  This  has  led  to 
the  sage  remark  that  "the  echo  of  a  departed  boom  is  the 
saddest  sound  in  nature." 

The  real-estate  boom.  The  wave  of  speculation  in  land  which 
is  known  as  a  real-estate  boom  is  one  of  the  most  interesting  and 
•instructive  of  all  subjects  of  economic  study.  No  one  has  ever 
been  able  to  explain  just  how  it  starts,  but  after  it  has  started, 
it  is  not  so  difficult  to  understand.  Something  happens,  let  us 
say,  such  as  the  building  of  a  new  railroad,  the  opening  of  a 
new  mine,  or  the  location  of  a  new  factory,  to  produce  a  very 
rapid  rise  in  the  price  of  city  lots.  Men  double  and  quadruple 
their  money  in  a  short  time  by  merely  buying  and  selling  again 
at  a  higher  price.  This  sets  them  and  others  crazy.  Everyone 
wants  to  buy  lots  for  the  purpose  of  selling  again.  The  first 
effect  is  to  increase  greatly  the  number  of  buyers,  and  the  effect 
of  this  is  to  'send  the  prices  still  higher.  These  buyers,  as  a 
consequence,  also  make  money  rapidly.  This  attracts  still  other 
buyers,  some  of  them  coming  from  long  distances  to  share  in 
the  harvest.  So  long  as  buyers  are  increasing  faster  than  sellers, 
prices  continue  to  go  up ;  but  when  the  buyers  become  less 
numerous  than  the  sellers,  which  must  inevitably  happen,  prices 
begin  to  fall.  Suddenly  everyone  becomes  a  seller,  and  there 
are  no  buyers  at  all.  Stagnation,  depression,  bankruptcy,  and 
general  ruin  ensue. 

The  recovery  is  very  slow.  The  men  who  are  left  with  land 
on  their  hands  are  not  fitted  to  use  it.  They  did  not  want  it  for 
use ;  they  wanted  it  only  to  sell.  This  means  an  inefficient  use 
of  the  land.  Besides,  even  those  owners  who  are  fitted  to  put 
the  land  to  an  economic  use  are  handicapped  because  they  put 
too  much  money  into  the  land  and  have  too  little  with  which  to 
develop  or  use  it.  Those  who  were  lucky  enough  to  sell  out  in 
good  time  are  very  careful  not  to  let  go  of  their  money  or  to 


ECONOMIC  CRISES  435 

invest  it  in  productive  industry.  Years  usually  elapse  before 
the  city  recovers  from  the  disaster. 

Speculation  in  farm  land,  in  railroads,  in  mining,  as  well  as  in 
Belgian  hares,  tulips,  and  Shorthorn  cattle,  has  produced  a 
number  of  historic  depressions  of  this  kind. 

The  overinvestment  theory.  There  are,  however,  even  more 
fundamental  and  far-reaching  reasons  than  these  for  a  certain 
tendency  to  overinvestment  in  certain  special  lines  of  industry. 
Overinvestment  may  produce  very  much  the  same  results  as 
overspeculation,  though  they  are  not  likely  to  be  so  acute  or  so 
sudden  in  their  appearance. 

Overinvestment  in  the  railroads  of  the  Far  West  is  supposed 
to  have  had  something  to  do  with  the  panic  of  1857.  The  money 
was  spent,  the  railroads  were  built,  and  then  it  began  to  appear 
that  it  would  be  some  years  before  there  would  be  business 
enough  to  put  the  railroads  on  a  paying  basis.  Meanwhile  all 
that  capital  had  been  diverted  from  other  industries,  which 
suffered  in  consequence.  In  many  cases,  however,  the  shares 
of  the  new  railroad  enterprise  had  been  bought  on  credit.  As 
soon  as  it  appeared  that  dividends  were  not  speedily  to  be  forth- 
coming, the  value  of  the  shares  fell  rapidly,  and  those  who  had 
invested  on  credit  in  many  cases  suffered  bankruptcy. 

There  is  something  also  in  the  very  nature  of  modern  indus- 
try which  seems  to  render  it  highly  sensitive.  The  countries 
which  show  the  largest  amount  of  enterprise  and  the  adventur- 
ing spirit  not  only  expand  most  rapidly  but  also,  at  the  same 
time,  seem  to  have  the  largest  number  of  industrial  depressions. 
The  tendency  to  rush  headlong  into  new  enterprises  is  doubtless 
an  important  factor  in  national  expansion,  but  it  also  produces 
a  severe  reaction  when  this  headlong  spirit  rushes  too  far  in  a 
given  direction. 

One  characteristic  of  a  modern  industrial  community  is  the 
proportion  which  producers'  goods  hold  to  the  total  wealth. 
This  means  that  a  large  part  of  the  wealth  is  in  forms  which 
have  no  utility  in  themselves  but  which  derive  their  utility  from 


436  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  goods  which  they  help  to  produce.  A  satisfactory  explana- 
tion of  industrial  depression  must,  in  the  opinion  of  the  author, 
be  sought  in  the  laws  of  value  which  govern  investment  in 
this  class  of  goods,  rather  than  in  the  conditions  of  the  money 
market  or  those  of  organized  credit.1 

Violent  fluctuations  of  the  value  of  producers'  goods  on  the 
investors'  market.  Let  us  begin  by  noticing  a  few  elementary 
facts.  Every  farmer  knows  that  a  horse  which  will  not  earn 
more  than  his  feed,  or  a  piece  of  land  which  will  not  produce 
more  than  it  costs  to  cultivate  it,  is  of  no  value.  Likewise  every 
business  man  knows  that  an  establishment  that  cannot  be  made 
to  pay  more  than  running  expenses  is  worth  nothing  except  as 
old  iron.  This  is  equivalent  to  saying  that  the  value  of  such  an 
establishment — or,  indeed,  of  any  productive  agent — is  deter- 
mined not  by  the  total  value  of  its  product  but  by  the  excess  of 
that  total  value  over  and  above  the  running  expenses.  When  the 
running  expenses  are  high  and  the  output  is  large,  so  that  the 
earnings  depend  upon  small  profits  and  large  sales,  a  very 
slight  rise  in  the  value  of  the  product  may  double  or  more 
than  double  the  value  of  the  establishment,  provided,  of  course, 
that  the  rise  in  value  is  believed  to  be  permanent.  Let  us 
suppose  that  a  certain  shoe  factory  can  be  made  to  turn  out 
100,000  pairs  of  shoes  in  a  year  at  a  uniform  cost  of  $8  a  pair. 
If  these  shoes  cannot  be  sold  at  more  than  $8  a  pair  the  plant  is 
worthless,  but  if  they  can  be  sold  at  $8.25  a  pair  the  earnings 
of  the  plant  will  be  $25,000,  which,  capitalized  at  5  per  cent, 
will  make  it  worth  $500,000.  If,  however,  the  price  of  shoes 
should  rise  to  88.50  the  earnings  of  the  plant  would  be  doubled, 
and  if  this  rise  in  value  were  believed  to  be  permanent  the  value 
of  the  plant  would  be  doubled.  Thus  an  increase  of  only  one 
thirty-third  in  the  value  of  the  product  would  double  the  value 
of  the  plant.  In  the  same  way,  a  subsequent  fall  of  one  thirty- 
fourth  in  the  value  of  the  product  would  reduce  the  value 
of  the  plant  by  one  half,  while  a  fall  of  one  seventeenth  in  the 

aSee  "A  Suggestion  for  a  Theory  of  Industrial  Depression,"  Quarterly 
Journal  of  Economics  (May,  1903),  p.  497. 


ECONOMIC  CRISES  437 

value  of  the  product  would  destroy  the  value  of  the  plant 
altogether.  This  may  be  stated  as  a  general  law  to  the  effect 
that  a  slight  fluctuation  in  the  value  of  a  product  tends  to  pro- 
duce a  violent  fluctuation  in  the  value  of  the  establishment 
producing  it.  Stated  in  still  more  general  terms,  the  value  of 
producers'  goods  tends  to  fluctuate  more  violently  than  the 
value  of  consumers'  goods. 

This  law  is  capable  of  still  further  extension  when  we  con- 
sider that  producers'  goods  are  themselves  produced  by  other 
productive  agents.  The  different  parts  of  the  shoe  factory  of 
the  above  illustration  were  produced  in  other  factories,  and  the 
fluctuations  in  the  value  of  the  shoe  factory  would  tend  to  pro- 
duce still  more  violent  fluctuations  in  the  values  of  the  establish- 
ments producing  the  different  parts,  for  the  same  reasons  as 
were  given  above.  The  law  might  therefore  be  extended  so  as 
to  read,  The  farther  removed  the  producers'  goods  are  from 
some  consumable  product,  the  more  violent  the  fluctuations  in 
value  tend  to  be. 

This  would  be  the  tendency  until  that  stage  was  reached 
where  the  producers'  agents  were  no  longer  especially  connected 
with  one  particular  line  of  production  and  were  not,  therefore, 
affected  merely  by  changes  in  price  of  the  one  kind  of  consum- 
able product. 

It  must  be  admitted  that  the  fluctuations  in  the  value  of 
producers'  goods  were  never  actually  so  violent  as  the  fore- 
going illustrations  have  supposed,  mainly  for  the  reason  that 
not  every  rise  or  fall  in  the  value  of  products  is  believed  to  be 
permanent.  But  where  the  high  or  low  price  of  a  product 
continues  for  some  time  it  invariably  leads  to  a  belief  that  it 
is  likely  to  continue,  and  this  raises  or  depresses  the  price  of  the 
productive  agent  out  of  proportion  to  the  rise  or  fall  in  the 
price  of  the  product. 

In  this  connection  it  is  well  to  observe  that  while  the  imme- 
diate demand  for  consumers'  goods  comes  from  consumers 
themselves,  the  immediate  demand  for  producers'  goods  comes 
from  investors.  Since  their  willingness  to  invest  depends  not 


438  PRINCIPLES  OF  NATIONAL  ECONOMY 

upon  the  value  of  the  gross  product  of  the  productive  agent 
but  upon  the  excess  of  that  gross  product  over  and  above  the 
cost  of  using  the  agent, — which  excess  has  been  shown  to 
fluctuate  more  violently  than  the  total  value, — the  instability 
of  the  investors'  market  is  therefore  not  altogether  due  to 
psychological  changes  on  their  part,  but  in  a  large  degree  to 
the  objective  causes  which  affect  the  value  of  the  things  in 
which  they  invest. 

A  slight  rise  in  the  price  of  consumers'  goods  will  so  increase 
the  value  of  the  producers'  goods  which  enter  into  their  pro- 
duction as  to  lead  to  larger  investment  in  producers'  goods. 
The  resulting  large  market  for  the  latter,  again,  stimulates 
the  production  of  such  goods  and  withdraws  productive  energy 
from  the  creation  of  consumers'  goods.  This  for  the  time 
tends  to  raise  the  price  of  consumers'  goods  still  higher,  and 
this,  again,  to  stimulate  still  further  the  creation  of  producers' 
goods.  There  is  no  check  to  this  tendency  until  the  new 
stocks  of  producers'  goods  begin  to  pour  upon  the  market  an 
increased  flow  of  consumers'  goods.  This  tends  to  produce  a 
fall  in  their  value,  which  in  turn  produces  a  still  greater  fall 
in  the  value  of  producers'  goods ;  and  so  the  process  goes. 
There  seems,  therefore,  to  be  a  fundamental  reason  for  the 
periodicity  of  industrial  depression,  which  can  be  removed 
only  by  such  a  complete  knowledge  and  understanding  of  the 
situation  as  would  enable  the  business  world  to  foresee  the 
tendencies  and  take  measures  to  overcome  them. 

These  observations  regarding  the  law  of  value  as  applied 
to  different  classes  of  goods  may  throw  some  light  on  the  rela- 
tive stability  in  the  price  of  a  consumable  article,  such  as 
sugar,  in  comparison  with  the  price  of  such  an  article  as  steel, 
which  belongs  chiefly  to  the  class  of  producers'  goods  several 
steps  removed  from  consumers'  goods.  The  market  for  sugar 
is  mainly  a  consumers'  market,  while  the  market  for  steel  is 
mainly  an  investors'  market.  A  consumers'  market  depends 
upon  the  willingness  of  the  public  to  consume,  while  an  inves- 
tors' market  depends  upon  their  willingness  to  invest.  As  was 


ECONOMIC  CRISES  439 

shown  above,  there  are  reasons,  other  than  psychological,  why 
an  investors'  market  must  be  more  unstable  than  a  consumers' 
market. 

Even  consumable  commodities  are  sometimes  affected  by 
a  speculative  tendency ;  in  other  words,  consumers  themselves 
sometimes  speculate  a  little  in  the  goods  which  they  buy 
for  their  own  direct  consumption.  When  prices  are  tending 
upward  and  it  is  expected  that  they  will  continue  upward,  there 
is  a  distinct  tendency  to  accelerate  buying.  The  consumer 
foresees  that  he  must  sooner  or  later  buy  sugar,  shoes,  clothes, 
coal,  and  furniture.  Since  he  must  buy  them  anyway,  and  the 
price  is  probably  lower  now  than  it  will  be  later,  he  reasons 
that  he  might  as  well  buy  now.  If  he  does  not  reach  this 
conclusion  by  his  own  unaided  reasoning,  some  dealer  is  usually 
willing  to  aid  him  by  supplying  arguments  in  favor  of  buying 
at  once.  When  consumers  generally  begin  thus  to  accelerate 
their  buying  it  tends  still  further  to  stimulate  the  rise  of  prices. 
This,  in  turn,  furnishes  a  still  stronger  reason  for  early  buying 
before  prices  get  any  higher,  etc.  But  acceleration  cannot  go 
on  indefinitely.  Sooner  or  later  everybody  is  stocked  up, 
and  even  though  one  continues  to  carry  a  full  stock  of  all  neces- 
sary supplies,  his  rate  of  buying  becomes  normal.  The  rate 
accelerates  only  while  he  is  increasing  his  stocks.  When  he 
stops  increasing  them  he  stops  increasing  his  purchases  in  the 
immediate  present  and  therefore  stops  furnishing  a  further 
stimulus  to  a  further  rise  of  prices. 

On  the  other  hand,  when  the  upward  tendency  of  prices  has 
exhausted  itself,  and  it  begins  to  appear  that  prices  are  likely  to 
fall,  there  is  a  distinct  tendency  to  retard  the  buying  even  of 
necessaries.  If  prices  are  coming  down  everyone  who  can 
postpone  the  buying  of  anything  has  a  good  reason  for  so 
doing.  Those  who  stocked  up  during  the  period  of  rising  prices 
can  now  use  up  their  stock  and  thus  postpone  further  buying. 
This,  in  turn,  retards  and  reduces  the  effective  demand  in  the 
immediate  present.  This  tends  still  further  to  hasten  the  fall 
of  prices  and  this,  in  turn,  furnishes  a  still  stronger  reason  for 


440  PRINCIPLES  OF  NATIONAL  ECONOMY 

postponing  buying  as  far  as  possible,  etc.  After  a  time  all 
the  old  stocks  are  used  up  and,  as  there  is  no  opportunity  for 
further  postponement,  buying  becomes  normal  again.  It  is  for- 
tunate if  the  prices  do  not  start  violently  upward  again,  thus 
starting  another  cycle. 

These  two  tendencies — to  accelerate  buying  when  prices 
are  believed  to  be  rising  from  a  low  to  a  high  level  and  to 
retard  buying  when  they  are  believed  to  be  falling  from  a  high 
to  a  low  level — not  only  affect  consumers  but  dealers  as  well. 
Altogether  they  help  to  account  for  those  periods  of  feverish 
prosperity  and  chilly  depression  which  are  so  noticeable  in  mod- 
ern times.  They  seem  to  be  a  necessary  accompaniment  of  any 
system  of  free  buying  and  selling.  At  least,  no  one  has  ever 
suggested  a  method  of  preventing  their  recurrence  without 
stopping  the  processes  of  free  buying  and  selling  and  sub- 
stituting some  sort  of  rationing  process  under  which  produc- 
tion and  distribution  would  be  carried  on  under  a  system  of 
authority  and  obedience  rather  than  under  the  system  of  free 
bargaining. 

Let  it  not  be  too  hastily  assumed  that  there  is  no  way  of 
preventing  these  recurring  business  depressions.  There  is  a 
remedy  for  every  economic  evil.  The  only  question  is  whether 
we  are  willing  to  pay  the  cost  of  the  remedy.  In  other  words, 
the  question  is  whether  the  evil  to  be  remedied  is  great  enough 
to  justify  the  cost  of  the  remedy.  There  are  a  great  many 
things  in  the  world  that  ought  to  be  reformed,  from  spelling 
up  to  clothes,  but  most  of  them  are  not  important  enough  to 
justify  the  trouble  it  would  take  to  reform  them.  We  must 
first  decide  whether  these  recurring  cycles  of  trade  with  their 
business  depressions  are  worth  reforming.  Nothing  should  be 
taken  for  granted  without  careful  investigation.  It  is  not 
impossible  that  more  progress  is  made  over  long  periods  of 
time  under  these  cycles  of  rapidly  increasing  business  activ- 
ity, rising  prices,  and  general  prosperity,  followed  by  decreas- 
ing business  activity,  falling  prices,  and  general  depression, 


ECONOMIC  CRISES  441 

than  we  should  have  with  constant  business  activity,  stable 
prices,  and  uniform  prosperity. 

Let  us  begin  with  one  or  two  analogies,  which,  of  course,  do 
not  prove  anything,  though  they  may  suggest  possible  conclu- 
sions. Probably  every  farmer  in  the  temperate  zone  would  say, 
if  asked  suddenly,  that  it  would  be  a  good  thing  if  the  cycle  of 
the  seasons  could  be  eliminated  so  that  we  could  have  summer 
all  the  time.  It  doubtless  seems  unfortunate  that  there  should 
be  a  winter  season  when  no  plants  grow  and  when  live  stock 
have  to  be  fed  with  stored-up  hay  and  grain.  And  yet  if  he 
observes  widely  he  will  find  that  the  greatest  agricultural  pros- 
perity and  progress  are  seen  in  precisely  those  zones  where  the 
cycle  of  rapid  plant  growth  followed  by  a  dormant  period  is 
most  marked.  Not  only  do  the  forces  of  plant  growth  seem  to 
worfc.  with  a  new  vigor  after  the  winter's  torpor  but  man  him- 
self seems  to  take  hold  of  the  spring  work  with  a  zeal  and 
enthusiasm  that  would  be  difficult  to  maintain  the  year  round  if 
there  were  no  seasons.  Again,  when  one  is  out  in  the  woods,  one 
is  not  usually  worried  lest  a  tree  or  a  branch  should  fall  on  him, 
in  spite  of  the  fact  that  he  sees  all  around  him  evidence  that 
trees  and  branches  have  fallen.  One  reason  is  that  all  the  trees 
and  branches  that  were  weak  and  ready  to  fall  were  blown  down 
in  the  last  storm.  Those  which  weathered  that  storm  are  not 
likely  to  fall  until  the  next  one.  It  is  not  impossible  that  a  large 
part  of  what  we  call  business  confidence,  on  which  so  much  of 
our  business  prosperity  depends,  is  due  to  the  fact  that  all  the 
important  business  houses  and  financial  institutions  that  were 
weak  enough  to  fail  were  eliminated  in  the  last  depression. 
Those  which  weathered  that  crisis  are  not  likely  to  fail  now 
nor  until  they  develop  weakness  or  unsoundness,  which  will  be 
tested  by  the  next  crisis.  Meanwhile  we  have  enough  confi- 
dence in  the  general  economic  conditions  to  justify  us  in  start- 
ing new  enterprises.  This  tends  to  unusually  active  business 
and  the  development  of  many  new  enterprises  which,  in  turn, 
call  for  another  testing  period  later  on.  This  may  so  increase 


442  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  effectiveness  of  the  general  process  of  trial  and  error,  varia- 
tion and  selection,  wholesale  experimentation  and  severe  test- 
ing (which  is  the  only  method  by  which  progress  comes  in  any 
field),  as  to  give  us  more  progress  in  the  long  run  than  we  should 
have  if  things  ran  along  at  a  uniform  rate.  In  short,  until  we 
are  more  certain  than  we  can  now  possibly  be  that  it  is  desirable 
to  eliminate  economic  crises,  we  would  probably  do  well  not 
to  dabble  too  much  with  remedies.  Nevertheless  remedies  may 
be  applied  if  we  care  to  pay  the  cost  of  them. 

Periods  of  depression  are  assumed  to  impose  special  hard- 
ships on  laborers.  Yet  it  is  an  observed  fact  that  wages  rise 
during  a  period  of  special  business  activity  and  that  it  is  very 
difficult  to  reduce  them  during  periods  of  depression.  Though 
there  may  be  some  reduction  they  seldom  go  back  to  the  old 
level.  The  process  of  forcing  wages  up  during  periods  of  ex- 
pansion and  holding  them  up  during  periods  of  contraction 
probably  does  more  for  labor  in  the  long  run  than  could  be  done 
if  there  were  no  periods  of  special  expansion  and  contraction. 

In  the  chapter  on  The  Purchasing  Power  of  Money  it  was 
pointed  out  that  prices  could  be  stabilized  by  several  methods. 
This  would,  in  itself,  go  a  long  way  toward  stabilizing  busi- 
ness. Few  things  so  stimulate  "business  activity  as  rising  prices, 
though  rising  prices  and  abnormal  business  activity  are  gen- 
erally joint  results  of  active  buying.  To  prevent  prices  from 
rising  would  have  a  dampening  effect  on  business  expansion. 
Falling  prices,  on  the  contrary,  discourage  business  activity. 
To  prevent  their  falling  would  remove  the  discouragement. 
When  prices  rise  because  of  abnormally  active  buying  by 
consumers,  the  most  effective  way  to  prevent  their  rising  is 
to  retard  buying ;  when  they  fall  because  of  slow  buying  by 
consumers,  the  most  effective  way  to  prevent  their  falling  is  to 
stimulate  buying. 


CHAPTER  XXXI 

FREE  TRADE 

Advantages  of  exchange  among  individuals  of  the  same 
country.  Freedom  of  exchange  between  individuals  is  so 
clearly  advantageous  that  practically  no  one  advocates  serious 
restrictions  upon  it.  Freedom  of  trade  between  different  sec- 
tions of  the  same  country  also  is  generally  approved.  It  would 
seem  absurd  for  the  South,  which  is  peculiarly  adapted  to  cot- 
ton, to  try  to  be  entirely  self-supporting  and,  especially,  to 
produce  certain  things,  such  as  wheat,  for  which  its  soil  and 
climate  are  not  so  well  suited  as  are  those  of  other  sections  of 
the  country.  No  one  would  seriously  advocate  an  interference 
with  the  shipments  of  wheat  and  wheat  flour  to  the  South 
or  of  cotton  to  the  North. 

Advantages  of  exchange  among  individuals  of  different  coun- 
tries. It  is  argued  by  a  large  majority  of  the  students  of  eco- 
nomics that  the  same  arguments  which  favor  a  policy  of  freedom 
of  exchange  within  the  country  are  equally  in  favor  of  freedom 
of  exchange  between  different  countries.  The  lines  which  sepa- 
rate one  country  from  another  are  frequently  arbitrary  political 
boundaries  and  do  not  necessarily  interfere  with  the  channels 
of  advantageous  commerce.  These  students  would  hold  that 
there  is  no  more  reason  why  there  should  be  an  interference 
with  freedom  of  trade  across  the  St.  Lawrence  and  the  Great 
Lakes  than  across  the  Ohio  River  or  the  Mississippi.  If  there 
are  individuals  in  Canada  who  desire  products  from  the  United 
States,  and  individuals  in  the  United  States  who  desire  prod- 
ucts from  Canada,  there  is  no  more  reason  why  they  should 
be  forbidden  to  make  the  exchange  than  there  is  why  two 
citizens  from  different  states  of  the  United  States  should  be 
forbidden  to  exchange  their  products. 

443 


444  PRINCIPLES  OF  NATIONAL  ECONOMY 

The  diversion  of  labor  and  capital  from  the  more  productive 
into  the  less  productive  industries.  The  positive  argument  in 
favor  of  freedom  of  trade  rests  upon  one  or  two  fundamental 
propositions.  One  of  these  is  that  the  labor  and  capital  of  any 
region  tend  of  themselves  to  seek  those  opportunities  and  to 
develop  those  industries  which  are  most  profitable  to  them- 
selves. From  this  it  would  follow  that  any  interference  with 
this  process,  or  any  attempt  to  develop  an  industry  in  a  region 
where  it  would  not  develop  without  special  favors,  must  neces- 
sarily be  a  mistake.  It  would  merely  divert  labor  and  capital 
from  the  more  productive  to  the  less  productive  industry.  Left 
to  themselves,  labor  and  capital  in  the  southern  part  of  the 
United  States  will  go  into  the  growing  of  cotton  without  any 
governmental  encouragement.  This  is  a  sign  that  cotton- 
growing  is  one  of  the  most  productive  opportunities  of  that 
region.  Any  attempt  to  tax  cotton-growing,  and  out  of  the 
proceeds  to  pay  a  bounty  to  some  other  industry,  would  mean 
merely  that  a  certain  amount  of  the  labor  and  capital  of  the  South 
would  be  diverted  from  the  cotton  industry,  in  which  it  is  most 
productive,  into  an  industry  in  which  it  would  be  less  produc- 
tive. If  the  new  industry  is  not  less  productive,  labor  and 
capital  would  go  into  it  anyway ;  if  it  is  less  productive,  it 
would  be  a  waste  of  resources  to  divert  labor  and  capital  into 
it  instead  of  allowing  them  to  go  where  they  would  naturally  go. 

Against  this  fundamental  proposition  of  the  free-trade  school 
the  protectionists  have  never  been  able  to  launch  a  successful 
frontal  attack.  They  have,  however,  attacked  the  policy  of 
free  trade  at  other  points.  The  arguments  which  they  have 
been  able  to  use  have,  on  the  whole,  proved  somewhat  more 
popular  than  this  severely  simple  doctrine  on  which  is  based 
the  free-trade  argument.  There  are  six  popular  arguments  in 
favor  of  protection,  besides  some  others  that  are  not  so  popular, 
though  perhaps  of  greater  scientific  weight.  These  six  argu- 
ments may  be  characterized  as  follows :  ( i )  the  balance-of- 
trade  argument;  (2)  the  home-market  argument;  (3)  the 
infant-industries  argument;  (4)  the  standard-of-living  argu- 


FREE  TRADE  445 

ment;  (5)  the  antidumping  argument;  and  (6)  the  necessity  - 
for-military-supplies  argument. 

The  balance-of-trade  argument.  By  the  balance-of-trade  argu- 
ment is  meant  the  old  theory  that  a  nation  is  rich  when  it 
sells  abroad  more  than  it  buys.  There  is  a  certain  superficial 
analogy  between  the  condition  of  the  private  individual  and 
that  of  the  nation.  It  looks  at  first  thought  as  though  the  pri- 
vate individual  who  is  selling  more  than  he  is  buying  were 
getting  rich.  This,  however,  is  only  an  appearance.  It  is  true 
that  so  long  as  he  is  selling  more  than  he  is  buying  he  is  accumu- 
lating money,  but  unless  he  invests  that  money  sooner  or  later, 
it  will  do  him  no  good.  When  he  invests  he  is  really  buying 
something  with  it ;  otherwise  he  merely  becomes  a  miser  and 
hoards  his  money  instead  of  using  it.  The  individual  who 
saves  or  who  accumulates  money  for  a  time,  say  for  a  year, 
may  be  prospering  in  the  sense  that  he  is  accumulating  the 
power  to  purchase  something  else  later  on ;  but  suppose  that 
during  the  next  year  he  invests  all  the  accumulations  of  the 
preceding  year :  then  it  will  happen  that  during  this  next  year 
he  will  be  buying  more  than  he  is  selling.  No  one  will  contend 
that  he  grows  poorer  by  the  process. 

Similarly  with  the  nation  that  continually  sells  more  than 
it  buys :  if  it  never  buys  anything  from  the  outside  with  this 
surplus,  the  money  is  of  no  use  to  it ;  if  it  merely  keeps  it  in 
circulation  within  its  own  boundaries,  it  will  have  more  money 
in  circulation,  but  no  more  goods.  Sooner  or  later,  however, 
this  process  must  come  to  an  end,  for  if  prices  continue  to  rise 
within  the  country,  it  becomes  a  poor  country  in  which  to  buy 
products.  Foreign  buyers  will,  so  far  as  possible,  go  to  other 
markets  for  their  supplies.  At  the  same  time  it  becomes  a  good 
country  in  which  to  sell.  Foreign  producers  will  seek  to  sell 
their  goods  within  the  country  where  high  prices  prevail,  and 
if  the  prices  are  high  enough  the  protective  tariff  ceases  to  be 
a  hindrance.  The  combination  of  these  two  processes  would 
speedily  drain  some  of  the  surplus  money  out  of  the  country; 
that  is,  when  foreign  producers  sell  large  quantities  to  the  coun- 


446  PRINCIPLES  OF  NATIONAL  ECONOMY 

try,  and  foreign  buyers  purchase  small  quantities,  there  must 
come  an  equilibrium  in  prices  so  far  as  the  commodities  which 
enter  into  international  trade  are  concerned.  There  are  some 
commodities  and  services  which  do  not  enter  into  international 
trade,  and  the  prices  of  these  may  remain  on  different  levels 
for  considerable  periods  of  time. 

During  the  first  year  or  two  of  the  World  War,  which  was 
inflicted  upon  an  astonished  world  by  the  Turco-Teutonic 
powers,  Americans  had  an  excellent  illustration  of  the  fallacy 
of  the  balance-of-trade  argument.  We  immediately  began  sell- 
ing vast  quantities  of  supplies  to  the  Allies,  who  were  defend- 
ing themselves  against  attack  and  invasion.  Their  productive 
power  was  diverted  from  the  field  of  industry  into  the  field 
of  war,  so  that  they  had  very  little  to  sell  to  us.  The  con- 
sequence was  that  vast  amounts  of  money  had  to  be  sent  in 
payment  for  the  supplies  which  we  sent  to  them.  It  looked 
for  a  time  as  though  we  were  prospering  amazingly  by  this 
process.  Money  was  very  abundant,  but  goods  were  becoming 
scarce.  It  was  not  long  before  the  people  began  to  realize  that 
they  could  not  live  on  money, — that,  after  all,  goods  were  what 
they  wanted.  Some  relief  came  when  the  United  States  began 
to  lend  the  money  back  to  the  Allies,  so  that  they  could  pur- 
chase more  and  more  supplies ;  that  is,  some  of  the  surplus 
money,  instead  of  being  used  in  the  purchase  of  ordinary  com- 
modities, was  used  in  the  purchase  of  foreign  securities,  in- 
cluding the  bonds  of  foreign  governments. 

Nothing  could  be  more  elementary  or  more  incontrovertible 
than  that  every  country  must  in  the  long  run  pay  for  its 
foreign  supplies  with  its  own  products.  If  it  happens  to  pro- 
duce gold  and  silver  in  large  quantities,  these  must  of  course  be 
reckoned  among  its  own  products,  and  it  may  pay  for  a  portion 
of  its  foreign  supplies  with  this  gold  and  silver.  In  the  long 
run,  therefore,  the  country  that  restricts  importation  must 
necessarily  and  in  exactly  the  same  degree  restrict  exportation. 

The  home-market  argument.  As  to  the  home-market  argu- 
ment, this  has  been  peculiarly  effective  with  farmers.  It  has 


FREE  TRADE  447 

been  pointed  out  to  them  that  unless  factories  are  built  in 
their  own  neighborhood,  they  must  depend  upon  distant  mar- 
kets for  the  sale  of  their  products.  To  sell  their  products  in 
these  distant  markets  and  get  their  own  supplies  back,  it  is 
said,  involves  heavy  expenses  in  the  form  of  freight  rates.  If 
these  expenses,  however,  were  so  heavy  as  to  overbalance  the 
other  advantages  and  disadvantages  involved,  manufacturing 
would  be  developed  in  the  home  market  without  any  govern- 
ment aid  or  interference.  If,  for  example,  the  difference  in  the 
cost  of  growing  wheat  in  Alabama  and  North  Dakota  were 
less  than  the  freight  rates  from  North  Dakota  to  Alabama, 
Alabama  would  find  it  advantageous,  without  any  government 
help,  to  grow  her  own  wheat ;  but  if  it  costs,  let  us  say,  twenty 
cents  more  per  bushel  to  grow  wheat  in  Alabama  than  in 
North  Dakota,  and  the  freight  rate  is  only  ten  cents,  then  it 
would  be  very  much  more  profitable  to  import  wheat  or  wheat 
flour  from  North  Dakota. 

The  same  principle  would  apply  to  manufacturing  products, 
If  the  difference  in  the  cost  of  manufacturing  a  yard  of  cloth 
in  Kansas  and  in  New  England  is  less  than  the  freight  rate  from 
New  England  to  Kansas,  some  cotton  manufacturer  would  be 
pretty  certain  to  locate  his  business  in  Kansas  in  order  to  save 
that  freight  rate ;  but  if  the  difference  in  the  cost  of  produc- 
tion is  greater  than  the  freight  rate,  then  it  would  be  a  mistake 
to  encourage  the  manufacture  of  cloth  in  Kansas.  This  prin- 
ciple would  apply  between  different  countries  as  well  as  between 
different  sections  of  the  same  country.  The  home  market, 
in  short,  is  preferable  to  a  distant  market  only  when,  with  a 
given  amount  of  productive  energy,  more  can  be  produced  by 
saving  transportation  than  can  be  produced  even  when  goods 
have  to  be  transported  over  long  distances. 

The  infant-industries  argument  As  to  the  infant-industries 
argument,  there  is  undoubtedly  something  to  be  said  on  the 
side  of  protection.  The  argument  is  good,  however,  only  on 
condition  that  the  infant  industry,  after  it  is  once  established 
and  ceases  to  be  an  infant  industry,  is  then  able  to  take  care 


448  PRINCIPLES  OF  NATIONAL  ECONOMY* 

of  itself  without  further  protection.  If  it  is  not,  and  if  it  con- 
tinually needs  protection,  the  policy  is  one  not  for  the  pro- 
tection of  infant  industries  but  for  the  protection  of  those  that 
are  in  a  state  of  senile  decay.  It  is  a  policy  for  keeping  alive 
industries  that  ought  to  be  dead. 

There  are  two  rather  fundamental  objections  to  a  protective 
policy  based  on  the  infant-industries  argument.  In  the  first 
place,  no  matter  how  much  protection  is  given  to  any  industry, 
there  will  always  be  certain  establishments  that  are  just  on  the 
margin  of  bankruptcy.  There  will  be  men  who  are  so  poorly 
qualified  for  managing  a  business  or  who  have  located  their 
businesses  in  such  disadvantageous  places  that  they  have  to 
compete  with  more  productive  industries  for  their  labor  and 
supplies  and  are  thus  barely  able  to  keep  going.  Any  attempt 
to  double  or  treble  the  amount  of  production  merely  calls  into 
existence  business  establishments  run  by  less  qualified  man- 
agers or  located  in  less  advantageous  positions,  so  that  with 
respect  to  business  establishments  it  becomes  a  truism  that 
"the  poor  ye  have  with  you  always."  Conversely,  any  attempt 
to  take  away  or  reduce  the  amount  of  protection  will  neces- 
sarily mean  bankruptcy  to  those  marginal  establishments. 
They  can  always  bring  pressure  to  bear  upon  Congress  and  can 
always  show  convincingly  that  they  would  be  ruined  if  pro- 
tection were  taken  away.  Thus  the  infant-industries  argument 
sooner  or  later  inevitably  becomes  an  argument  in  behalf  of 
the  small  or  the  inefficient  producer.  In  the  second  place,  as 
laws  are  made  in  any  democratic  country,  the  lobby  (which 
has  sometimes  been  called  the  third  House  of  Congress)  is  a 
powerful  factor.  The  real  infant  industry  is  seldom  able  to 
support  a  powerful  lobby.  Generally  speaking,  the  larger  and 
more  prosperous  the  industry,  the  larger  and  more  efficient  the 
lobby  which  it  can  support.  This  makes  it  extremely  improb- 
able that  the  infant  industry  will  get  protection  and  extremely 
probable  that  the  gigantic  industry  will  get  it. 

The  standard-of-living  argument.  By  the  standard-of-living 
argument  is  meant  the  contention  that,  since  American  laborers 


FREE  TRADE  449 

get  higher  wages  and  maintain  a  higher  and  more  expensive 
standard  of  living  than  most  foreign  laborers,  it  is  necessary 
to  compensate  the  manufacturer  for  these  higher  wages  by 
enabling  him  to  get  somewhat  higher  prices  for  his  product. 
From  the  free-trader's  point  of  view  this  looks  like  putting 
the  cart  before  the  horse.  The  reason  why  wages  are  higher 
in  one  country  than  another  is  that  labor  is  more  productive 
in  the  one  than  in  the  other.  If  labor  is  more  productive  the 
laborer  creates  the  product  out  of  which  his  higher  wages  are 
to  be  paid.  We  have  had  such  an  abundance  of  natural  re- 
sources and,  on  the  whole,  compared  with  old  and  overcrowded 
countries,  such  a  dearth  of  labor  that  the  marginal  productivity 
of  labor  has  been  high  in  this  country.  The  unprotected  in- 
dustries pay  these  wages  as  well  as  do  the  protected.  If  a  given 
industry  is  not  able  to  compete  against  agriculture  and  mining 
in  hiring  labor,  that  is  a  sign  that  the  industry  in  question  is 
not  so  productive  as  agriculture  and  mining.  Therefore  it 
would  be  a  mistake  to  tax  the  more  productive  industries  in 
order  to  allow  a  bounty  or  a  higher  price  to  the  less  productive 
industry.  In  the  past,  at  any  rate,  there  have  been  so  many 
opportunities  for  poor  people  to  go  onto  the  land  and  work 
for  themselves,  and  eventually  to  become  landowners,  that 
manufacturers  have  had  some  difficulty  in  getting  labor  for  their 
factories.  In  other  words,  labor  has  found  a  better  opportunity 
somewhere  else.  Two  methods  have  been  resorted  to  by  the 
manufacturers  to  overcome  this  difficulty.  One  has  been  the 
wholesale  Importation  of  foreign  labor ;  the  other,  the  securing 
of  protective  duties  in  favor  of  their  business.  It  would  seem 
that  anyone  with  a  sense  of  humor  could  hardly  keep  his  face 
straight  while  importing  the  cheapest  kind  of  foreign  labor  to 
fill  his  factory  and  at  the  same  time  demanding  protection  in 
order  that  American  labor  might  maintain  its  high  standard 
of  living. 

The  antidumping  argument.  As  to  the  antidumping  argu- 
ment, there  is  a  certain  justification  for  it.  By  the  antidumping 
argument  is  meant  the  argument  that  an  old  and  well- 


450  PRINCIPLES  OF  NATIONAL  ECONOMY 

established  industry  may,  whenever  it  finds  itself  with  a  surplus 
product  which  is  difficult  to  sell  in  its  own  country,  offer  it 
for  sale  in  a  foreign  country  far  below  the  cost  of  production ; 
or,  as  the  argument  is  put  in  the  country  where  protection  is 
advocated,  the  foreign  producer  may  dump  his  surplus  onto 
our  markets  and  demoralize  the  business  of  production  here. 

In  so  far  as  this  dumping  policy  is  temporary  and  spasmodic, 
there  is  a  good  deal  to  be  said  in  favor  of  the  policy  which  will 
restrict  it.  If,  for  example,  a  group  of  foreign  manufacturers 
were  to  dispose  of  a  temporary  surplus  in  this  country  far 
below  the  cost  of  production,  and  keep  it  up  spasmodically  for 
a  few  years,  it  might  cause  bankruptcy  among  our  own  pro- 
ducers and  discourage  others  from  entering  the  business.  As 
a  result  we  might  find  ourselves  in  a  short  time  with  no  industry 
of  our  own.  Then  the  foreign  producers  would  no  longer  need 
to  dump  their  surplus  onto  us,  but  could  charge  us  a  good 
high  price. 

On  the  other  hand,  if  the  policy  of  dumping  a  surplus  product 
on  our  markets  is  a  permanent  one,  there  is  everything  to  be 
said  in  favor  of  allowing  it  to  go  on  and  allowing  the  home  in- 
dustry to  die  out.  It  merely  enables  us  to  get  permanently  a 
product  much  cheaper  than  that  which  we  could  produce  our- 
selves. The  labor  and  capital  which  would  otherwise  be  engaged 
in  this  industry  would  now  better  be  engaged  in  some  other.  It 
has  been  humorously  pointed  out  that  the  greatest  case  of 
dumping  in  the  world  is  that  of  the  sun,  which  sends  us  light 
and  heat  at  ruinously  low  prices.  Inasmuch  as  it  is  a*permanent 
policy  of  the  sun,  we  can  easily  adjust  ourselves  to  it  and  dis- 
pense with  any  industry  which  would  propose  to  supply  us  with 
daylight  and  summer  heat. 

Not  many  years  ago  certain  countries  gave  a  bounty  for 
the  export  of  sugar.  This  looked  like  a  permanent  policy  for 
encouraging  the  dumping  of  a  certain  commodity  on  other 
markets.  The  chief  result  was  that  England.,  a  free-trade  coun- 
try, got  an  abundant  supply  of  very  cheap  sugar.  This  not 
only  gave  her  a  cheap  food  product  but  enabled  her  to  develop 


FREE  TRADE  451 

certain  industries,  such  as  the  making  of  jam  and  marmalade, 
on  a  large  scale  and  to  sell  the  products  of  these  industries  on 
the  markets  of  the  world,  sometimes  selling  them  back  to  the 
countries  which  had  given  a  bounty  on  the  exportation  of  sugar. 

The  military-defense  argument.  So  long  as  war  is  a  possi- 
bility the  necessity  for  military  defense  will  remain  with  us, 
and  so  long  as  we  must  be  prepared  for  military  defense  the 
argument  in  favor  of  producing  certain  essential  military  sup- 
plies at  home,  even  at  greater  cost  than  that  at  which  they  could 
be  procured  from  abroad,  will  be  overwhelming.  It  is  obvious 
that  at  the  very  time  when  we  need  military  supplies  most — in 
time  of  war — we  may  not  be  able  to  get  them  at  all  if  we 
depend  upon  foreign  sources.  This  would  apply  not  only  to 
military  supplies  in  the  technical  sense  (that  is,  goods  and 
ammunitions)  but  also  to  every  article  which  is  indispensable 
in  time  of  war.  It  might  easily  happen  that  a  nation  would  fail 
in  its  military  operations  by  reason  of  a  lack  of  some  single 
military  article  like  nitrogen  or  copper  and  suffer  a  national 
disaster  and  humiliation  in  consequence.  Until  we  can  be 
reasonably  certain  that  war  has  been  permanently  eliminated, 
the  argument  for  government  encouragement  of  the  production 
of  every  indispensable  military  article  is  overwhelming.  The 
free  trader  really  has  nothing  effective  to  say  against  it. 

Aside  from  these  six  arguments  there  are  certain  large  his- 
torical arguments  that  are  frequently  used  by  the  protectionist. 
It  is  pointed  out,  for  example,  that  America  has  prospered 
amazingly  under  a  protectionist  policy.  It  is,  however,  equally 
true  that  England  has  prospered  amazingly  under  her  free- 
trade  policy.  She  became  prosperous  before  her  European 
neighbors  did,  and  outstripped  them  all,  at  least  during  the  first 
half  century  of  her  free-trade  policy.  Again,  the  protectionist 
points  to  the  recent  rapid  advance  in  prosperity  and  industrial 
power  of  Germany  as  an  example  of  the  beneficence  of  the  pro- 
tectionist policy.  To  this  the  free  trader  may  retort,  first,  that 
Germany's  prosperity  began  with  the  formation  of  the  German 
Empire  in  1871.  The  taking  away  of  the  tariff  walls  between 


452  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  German  states  and  the  establishing  of  a  free-trade  area 
within  the  whole  empire  created  a  much  larger  free-trade  area 
than  had  formerly  existed.  Second,  the  efficiency  of  the  Ger- 
man system  of  technical  education  has  contributed  more  than 
any  other  single  factor  to  her  prosperity.  In  the  third  place, 
Germany  has  had  the  advantage  of  a  lower  standard  of  living. 
England  became  prosperous  long  before  Germany  did,  and  as  a 
result  of  her  prosperity  wages  rose  and  likewise  salaries  and 
all  living  expenses.  The  English  workingman  gets  higher  wages 
than  the  German  workingman.  All  the  salaried  men  in  Eng- 
lish factories  get  higher  wages  and  work  shorter  hours  than 
the  salaried  men  in  German  factories.  The  English  agents  in 
foreign  ports  not  only  get  higher  salaries  but  insist  on  week- 
end holidays  and  on  having  several  afternoons  off  during  the 
week  in  order  to  play  golf  and  tennis,  whereas  the  German 
agent  works  continuously  every  day  and  Sunday.  In  other 
words,  part  of  Germany's  advantage  has  been  her  lower  stand- 
ard of  living.  The  free  trader  would  say,  "Let's  wait  and  see 
how  long  Germany  can  maintain  her  low  standard  of  living 
after  she  has  become  as  prosperous  as  England."  It  may  be 
that  after  she  has  enjoyed  prosperity  as  long  as  England, 
there  will  come  the  same  softening  in  her  vigor,  the  same 
desire  for  luxurious  expenditure  and  leisure,  and  she  will  thus 
lose  her  chief  advantage  in  international  competition.  If  it  is 
any  comfort  for  the  protectionist  to  point  out  that  free  trade 
tends  to  overprosperity,  and  prosperity  to  softening,  he  is 
welcome  to  it. 


CHAPTER  XXXII 
PROTECTIONISM 

The  weight  of  the  argument  in  the  last  chapter  was  over- 
whelmingly in  favor  of  free  trade  except  in  the  matter  of  war 
supplies.  Sometimes,  however,  it  seems  as  though  the  free 
traders  were  willing  and  able  to  answer  all  the  arguments  in 
favor  of  protection  except  the  real  ones.  They  confine  them- 
selves, in  other  words,  to  the  popular  arguments  which  have  not 
now  and  never  did  have  any  support  from  serious  students  of 
the  problem.  The  following  arguments  may  not  appeal  to  the 
popular  mind  nor  furnish  much  support  to  any  particular  tariff 
bill ;  they  do,  however,  outline  certain  possibilities  of  a  protec- 
tive tariff  which  may  be  realized  if  the  government  really  wants 
to  go  about  it  seriously. 

Some  possibilities  of  a  protective  tariff.1  ( i )  A  tariff  duty  is 
not  necessarily  paid  by  the  home  consumer;  (2)  a  protective 
tariff  may  be  so  framed  as  to  raise  wages;  (3)  it  may  be  so 
framed  as  to  attract  labor  and  capital  from  the  less  productive 
into  the  more  productive  industries, — judged  from  the  stand- 
point of  the  community  rather  than  from  that  of  the  individual 
business  man. 

When  the  consumer  pays  the  tariff.  Whether  the  home  con- 
sumer pays  the  tariff  duty  or  not  depends  upon  whether  or 
not  it  raises  the  price,  in  the  home  market,  of  the  article 
upon  which  it  is  collected.  Whether  it  raises  the  price  or  not 
depends  upon  whether  it  reduces  the  supply  of  the  article 
in  the  home  market  or  not,  it  being  assumed  that  the  duty  will 
not  affect  the  demand.  The  effect  of  a  duty  is  ordinarily  to 
reduce  the  amount  of  the  article  imported.  The  question  is, 

1The  rest  of  this  chapter  is  from  a  paper  read  by  the  author  before  the 
American  Economic  Association  and  published  in  the  Proceedings  of  the  asso- 
ciation in  iqo2. 

453 


454  PRINCIPLES  OF  NATIONAL  ECONOMY 

Will  the  home  product  then  increase,  as  a  result  of  the  duty, 
sufficiently  to  counterbalance  the  diminution  in  the  amount 
imported?  If  the  conditions  are  such  that  a  tariff  duty  will 
occasion  an  increase  in  the  domestic  product  equal  to  the 
diminution  in  the  amount  imported,  the  duty  will  occasion  no 
change  in  the  total  supply  on  the  home  market  and  conse- 
quently no  general  change  in  the  price  of  the  article ;  but  if  the 
domestic  product  does  not  increase  sufficiently  to  offset  entirely 
the  diminution  in  the  amount  imported,  there  will  be  a  de- 
crease in  the  total  supply  on  the  home  market  and  consequently 
a  rise  in  price. 

When  the  increase  in  home  production  offsets  the  decrease  in 
importation.  The  question  then  becomes,  Under  what  condi- 
tions will  a  tariff  duty  occasion  sufficient  increase  in  the  domes- 
tic product  to  counterbalance  the  diminution  in  the  amount 
imported  ?  If  the  duty  is  laid  upon  an  article  not  producible  at 
home  under  existing  conditions  and  at  existing  prices,  there  can 
manifestly  be  no  such  increase  in  the  domestic  product,  and  the 
price  will  rise  in  consequence  of  the  duty.  How  large  a  share 
of  the  duty  will  be  added  to  the  price  of  the  article  will  depend 
upon  the  comparative  elasticity  of  the  demand  and  the  supply. 

When  the  foreign  producer  pays  the  tariff.  If  the  demand  is 
highly  elastic,  while  the  supply  is  inelastic,  only  a  small  propor- 
tion of  the  duty  will  be  added  to  the  price ;  that  is  to  say,  an 
elastic  demand  means  that  if  there  is  a  slight  rise  in  the  price 
of  the  article  to  the  consumer,  it  will  cause  a  great  falling  off 
in  the  amount  purchased.  In  other  words,  the  consumer  may 
be  said  to  have  considerable  power  of  resistance.  On  the  other 
hand,  if  a  considerable  fall  in  the  price  which  the  producer  can 
get  will  cause  only  a  slight  falling  off  in  the  amount  produced, 
as  will  happen  when  there  are  considerable  differences  in  the  cost 
of  producing  different  parts  of  the  supply,  the  supply  is  inelas- 
tic. When  the  demand  is  elastic  and  the  supply  relatively  ine- 
lastic, the  burden  of  a  tariff  duty  will  be  borne  largely  by  the 
foreign  producer  and  only  to  a  slight  degree  by  the  home  con- 
sumer. Reversing  the  argument  we  shall  reach  the  conclusion 


PROTECTIONISM  455 

that  when  the  demand  for  the  article  is  inelastic  and  the  supply 
relatively  elastic,  the  burden  of  the  duty  will  fall  largely  upon 
the  home  consumer. 

When  a  tariff  is  prohibitive.  When  both  the  supply  and  the 
demand  are  very  elastic  a  tariff  duty  will  tend  to  be  prohibitive  ; 
that  is  to  say,  if  a  slight  rise  in  the  price  to  the  consumer  would 
cause  a  large  falling  off  in  the  amount  consumed,  and  a  slight 
fall  in  the  price  to  the  producer  would  cause  a  great  falling  off 
in  the  amount  sent  to  the  tariff  country,  manifestly  neither 
the  producer  nor  the  consumer  can  be  made  to  pay  the  tariff, 
and  the  article  will  practically  cease  to  be  imported. 

If  the  article  is  produced  at  home,  but  under  the  law  of  ex- 
panding cost  (commonly  confused  with  the  law  of  diminishing 
returns),  the  presumption  is  that  as  much  is  already  being 
produced  at  any  given  time  as  can  be  produced  at  existing 
prices.  The  one  condition  for  an  increase  in  the  home  product 
is  that  there  shall  be  a  rise  in  price.  It  is  evident  that  the  do- 
mestic product  could  not  increase  sufficiently  to  keep  the  prices 
down,  for  the  reason  that  in  this  case  there  could  be  no  increase 
in  the  home  production.  A  duty  on  such  an  article  would  raise 
its  price  and  be  borne,  in  part  at  least,  by  the  home  consumer. 

In  case  the  duty  is  laid  upon  an  article  which  is  produced  at 
home  under  the  law  of  diminishing  cost  (provided  its  produc- 
tion has  not  been  monopolized),  a  different  result  follows.  In 
a  case  of  this  kind  the  shutting  out  of  a  part  of  the  foreign 
supply  increases  the  opportunities  for  the  marketing  of  the 
home  product ;  and  since  the  latter  is  increased  without  any 
increase  in  cost,  there  is  nothing  to  prevent  it  from  increas- 
ing enough  to  offset  entirely  any  diminution  in  the  amount  im- 
ported. In  this  case  there  is  no  reason  to  expect  that  the  price 
will  be  higher  under  the  tariff  than  it  would  be  without  the  tariff. 

The  shutting  out  of  a  part  of  the  foreign  supply  is  analogous 
to  a  normal  growth  in  the  consumption  of  the  article,  at  least  in 
so  far  as  it  affects  the  home  producers.  They  find  an  increase 
in  the  consumption  of  their  products,  and  it  makes  no  dif- 
ference to  them  whether  this  is  due  to  a  decrease  in  importa- 


456  PRINCIPLES  OF  NATIONAL  ECONOMY 

tion  or.  to  a  growth  in  the  normal  consumption  of  the  article. 
Few  economists  would  contend  that  a  normal  growth  in  the 
consumption  of  an  article  which  could  be  indefinitely  increased 
at  diminishing  cost  would  cause  the  article  to  sell  at  a  higher 
price.  It  is  the  position  of  this  chapter  that  there  is  no  better 
ground  for  contending  that  a  tariff  duty  on  an  article  already 
producible  at  home  under  the  law  of  diminishing  cost  would 
raise  the  price  of  the  article,  or  that  when  there  is  no  natural 
check,  such  as  increasing  cost,  to  the  home  production  there 
is  no  reason  why  the  home  production  may  not  increase  enough 
to  make  up  entirely  for  any  falling  off  in  the  amount  imported.1 

The  case  of  monopoly.  If,  however,  the  article  is  one  whose 
home  production  is  in  the  hands  of  a  monopoly,  the  shutting 
out  of  a  part  of  the  foreign  product  would  increase  the  monop- 
oly's power  over  the  home  market  and  give  it  an  opportunity  to 
exact  a  somewhat  higher  price  than  would  otherwise  be  pos- 
sible. There  is  a  very  widespread  belief  that  a  monopoly  fixes 
the  price  of  its  product  according  to  a  different  principle  from 
that  which  is  followed  by  a  single  producer  in  a  competitive 
industry,  but  such  is  not  the  case.  In  either  case  the  price  is 
fixed  at  the  point  which  will  yield  the  largest  net  income  to  the 
producer.  The  difference  is  that  the  individual  producer  in  a 
competitive  industry  has  to  face  a  different  set  of  conditions 
from  that  which  confronts  the  monopolists.  The  competitive 
producer  knows  that  if  he  charges  too  high  a  price  for  his  prod- 
ucts, his  sales  will  fall  off  rapidly,  not  only  through  the  unwill- 
ingness of  the  public  to  buy  the  product  but  also  through  his 
being  undersold  by  his  competitors.  If  he  held  a  monopoly  he 
would  know  that  a  similar  rise  in  the  price  of  the  product 
would  cause  his  sales  to  fall  off  less  rapidly  because  only  one 
(namely,  the  former)  of  those  two  forces  would  operate. 

While  both  the  monopolist  and  the  competitive  producer  try 
to  sell  at  the  point  of  highest  net  return,  that  point  is  likely  to  be 
somewhat  different  in  the  two  cases  because  of  the  differences 

1  In  fact,  there  are  reasons  for  believing  that  the  price  would  fall. 
Cf.  Alfred  Marshall,  Principles  of  Economics  (fourth  edition),  p.  525. 


PROTECTIONISM  457 

in  the  conditions  which  confront  the  two  producers.  The  com- 
petitive producer  has  two  checks  on  high  prices,  where  the 
monopolist  has  one ;  hence  a  monopoly  price  is  likely  to  be 
higher  than  a  competitive  price.  A  tariff  duty  which  shuts  out 
a  part  of  the  foreign  product  removes  one  of  the  checks  upon 
the  power  of  a  monopoly  to  charge  high  prices  and  changes  the 
location  of  the  point  of  highest  net  return. 

Can  a  tariff  increase  wages  ?  Whether  a  protective  tariff  can 
increase  the  price  of  labor  or  not  depends  first  upon  whether  or 
not  it  is  possible,  by  means  of  a  tariff,  to  increase  the  demand 
for  labor  relatively  to  the  demand  for  other  factors  of  produc- 
tion. If  this  can  be  done  labor  will  get  a  larger  share  of  the 
total  product  of  the  industry  of  the  community.  This  alone 
would  not  prove  that  the  individual  laborer  would  in  the  end  be 
better  off.  In  the  first  place,  the  supply  of  labor  might  increase 
correspondingly,  either  through  immigration  or  by  natural 
means,  and  in  this  event  there  would  be  no  increase  in  indi- 
vidual wages,  even  though  a  larger  share  of  the  total  product 
did  go  to  the  payment  of  labor.  In  the  second  place,  the  tariff 
might  diminish  the  total  product  of  industry  so  that  even  though 
the  laborers  did  get  a  larger  share  of  the  total  the  absolute 
amount  going  to  them  as  wages  might  be  no  greater  than,  indeed 
not  so  great  as,  before. 

As  to  the  first  objection,  it  needs  only  to  be  said  that  if  the 
tariff  increases  the  demand  for  labor,  that  will  tend  to  raise 
wages.  Whether  or  not  this  tendency  will  be  counteracted  by 
immigration  or  by  natural  increase  depends  upon  other  condi- 
tions. If  the  tariff  stimulates  immigration  or  increases  the  birth 
rate  over  what  it  would  be  without  a  tariff,  the  presumption  is 
that  it  does  so  because  it  increases  the  demand  for  labor  and 
raises  wages,  which  is  all  that  this  chapter  contends  for.  Wages 
may  or  may  not  be  subsequently  reduced  to  the  old  level  by 
other  forces  counteracting  the  tendency  of  the  tariff.  As  to  the 
second  condition,  it  is  hoped  that  the  third  part  of  this  chapter 
will  show  that  a  protective  tariff  does  not  necessarily  diminish 
the  total  product  of  industry. 


458  PRINCIPLES  OF  NATIONAL  ECONOMY 

Owing  to  the  limited  space  available  it  is  necessary  to  assume 
two  premises  as  the  basis  of  the  argument  for  the  proposition 
that  a  protective  tariff  may  be  so  framed  as  to  raise  wages 
within  the  country,  (i)  The  three  factors  of  production- 
land,  labor,  and  capital — are  combined  in  different  proportions 
in  the  production  of  different  commodities.  (2)  A  selected  in- 
dustry may  be  stimulated  and  made  to  grow  by  means  of  a 
protective  tariff.  Both  these  propositions  could  be  proved  if 
space  allowed,  but  neither  is  likely  to  be  disputed,  by  any  con- 
siderable number  of  people.  Assuming  them  to  be  true,  it  is 
necessary  only  to  stimulate,  by  means  of  a  protective  tariff,  the 
production  of  those  articles  into  which  labor  enters  as  the  prin- 
cipal factor,  leaving  unprotected  those  industries  into  which 
labor  enters  as  a  relatively  less  important  factor.  This  is  a 
process  of  artificial  selection  in  which  the  variation  which  makes 
selection  possible  is  found  in  the  different  proportions  in  which 
the  three  factors  are  combined  in  the  different  industries.  The 
favorable  variations,  from  the  standpoint  of  the  laboring  class, 
are  those  industries  in  which  labor  is  relatively  the  more  impor- 
tant factor,  and  the  unfavorable  variations  are  those  in  which 
labor  is  relatively  the  less  important  factor.  In  order  to  favor 
the  laboring  class  it  is  necessary  only  to  select  the  favorable 
variations ;  that  is,  to  build  up  by  artificial  means  those  indus- 
tries in  which  labor  is  the  principal  factor.  Even  though 
this  should  result  in  a  corresponding  injury  to  other  indus- 
tries, there  would  still  remain  a  net  gain  to  labor. 

Let  us  suppose,  by  way  of  illustration,  that  in  industry  A, 
at  a  given  period,  the  best  results,  from  the  standpoint  of  the 
entrepreneur,  are  ordinarily  obtained  by  combining  1000  acres 
of  land,  10  laborers,  and  $100,000  worth  of  capital.  These 
yield  a  product  worth  $20,000.  In  industry  B,  to  get  a  product 
of  the  same  value,  the  best  results  would  be  obtained  from  com- 
bining the  factors  in  the  following  proportions :  10  acres  of  land, 
20  laborers,  and  Si 00,000  worth  of  capital.  Wages  and  interest 
are  assumed  to  be  the  same  in  the  two  industries.  For  the  sake 
of  simplicity  capital  is  assumed  to  bear  the  same  ratio  to  product 


PROTECTIONISM 


459 


in  the  two  industries,  land  and  labor  being  the  varying  factors. 
By  building  up  industry  B,  even  at  the  expense  of  industry  A, 
there  will  result  a  net  increase  in  employment  of  labor,  though 
a  corresponding  decrease  in  the  employment  of  land.  This 
increase  in  the  employment  of  labor  means  an  increase  in  the 
demand  for  labor,  while  the  decrease  in  the  employment  of  land 
means  a  decrease  in  the  demand  for  land.  The  result  of  this 
situation  would  be  that  a  larger  share  of  the  total  product 
would  go  in  the  payment  of  wages  and  a  smaller  share  in  the 
payment  of  rent. 

In  the  following  tables,  I  represents  the  conditions  as  de- 
scribed above ;  II,  the  situation  after  industry  B  has  been  ex- 
panded 50  per  cent  and  industry  A  has  been  correspondingly 
contracted. 


ACRES 

LABORERS 

CAPITAL 

PRODUCT 

Industry 

A.  

JOOO 

IO 

$IOO,OOO 

$2O,OOO 

Industry 

B   

IO 

20 

I  OO,OOO 

20.OOO 

Totals 

IOIO 

^O 

$2OO,OOO 

$4O,OOO 

II 


ACRES 

LABORERS 

CAPITAL 

PRODUCT 

ZOO 

c 

$50,000 

$IO,OOO 

Industry  15   

15 

3° 

I  50,000 

30,000 

Totals   

<U  5 

•3C 

$200,000 

$40,000 

This  shows  a  decrease  of  495  in  the  number  of  acres  used  and 
an  increase  of  5  in  the  number  of  men  employed. 

We  need  here  to  guard  against  the  possibility  that  industry 
B,  while  using  fewer  acres  of  land,  might  require  a  kind  of  land 
that  is  so  very  scarce  that  the  rent  charge  would  be  higher 
than  in  A.  But  this  is  not  a  necessary  condition.  It  is  quite 
conceivable  that  the  two  industries  would  use  the  same  grade 
of  land.  It  is  even  conceivable  that  industry  B,  in  addition 
to  using  fewer  acres,  would  also  use  a  more  abundant  kind 


460  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  land,  where  rents  were  less  per  acre.  The  whole  difficulty 
could  be  avoided  by  starting  with  the  proposition  that  in  dif- 
ferent industries  rent  charges,  wages,  and  interest  enter  in 
varying  proportions.  Then,  by  selecting  for  governmental 
favor  those  industries  in  which  wages,  rather  than  rent  or 
interest,  form  the  chief  item  of  expense,  the  total  industry  of  the 
country  would  be  affected  favorably  from  the  standpoint  of  the 
wage  receivers. 

It  goes  without  saying  that  an  entirely  different  result  would 
be  obtained  by  selecting  for  governmental  favor  those  indus- 
tries in  which  rent  or  interest  form  the  chief  item  of  expense, 
—  a  result  advantageous  to  the  landlord  or  the  capitalist,  but 
disadvantageous  to  the  laborer.  It  must  be  confessed  also  that 
as  protectionism  has  been  applied  in  the  past,  especially  in 
England  before  the  repeal  of  the  corn  laws,  this  result  was 
quite  as  frequently  obtained  as  the  other.  There  is  some  dan- 
ger also  that  it  will  be  so  in  the  future,  owing  to  the  better 
lobbying  facilities  of  the  landowning  and  capitalistic  classes. 
But  that  is  another  matter. 

Do«s  a  tariff  favor  the  less  productive  industries  ?  The  prop- 
osition that  protection  attracts  labor  and  capital  from  the 
more  productive  to  the  less  productive  industries  has  long  been 
one  of  the  basic  principles  of  the  free-trade  school,  —  the  rock 
on  which  all  protectionist  theories  were  supposed  to  split. 
And  it  must  be  conceded  that  unless  this  position  can  be  suc- 
cessfully assailed,  the  free  trader  will  always  have  the  advan- 
tage in  the  argument. 

The  difficulty  with  the  proposition  lies  in  the  double  meaning 
which  is  given  to  the  word  "productive."  In  order  to  make  a 
true  proposition  of  it  this  word  must  be  given  a  certain  meaning, 
but  in  order  to  make  it  a  conclusive  argument  the  word  must 
have  quite  a  different  meaning.  From  the  standpoint  of  the  in- 
dividual business  man  a  productive  industry  is  a  profitable1 


want  of  a  better  term  the  words  "profit"  and  "profitable"  are  used 
in  the  more  popular  sense  which  agrees  with  the  use  of  the  terms  by  the  older 
writers  on  economics.  Profit  is  made  to  include  the  surplus  income  of  an  in- 
dustry over  and  above  the  cost  of  conducting  it.  In  this  broad  sense  it  includes 


PROTECTIONISM  461 

industry;  that  is,  an  industry  which  offers  the  opportunity  of 
making  a  surplus  gain  over  the  cost  of  running  the  business. 
From  the  standpoint  of  the  community  a  productive  industry  is 
one  which  increases  the  sum  total  of  utilities.  It  is  the  profit- 
ableness of  the  industry,  rather  than  its  productiveness  in  the  lat- 
ter sense,  which  causes  labor  and  capital  to  go  into  it.  It  is  only 
by  defining  " productive"  as  "profitable"  that  one  can  support 
the  proposition  that  labor  and  capital  will  seek  those  industries 
which  are  naturally  most  productive.  In  that  sense,  and  in 
that  sense  alone,  it  is  quite  true  that  protection  attracts  labor 
and  capital  from  the  more  productive  to  the  less  productive 
industries. 

Meaning  of  the  word  "productive."  But  in  order  to  have  any 
weight  as  an  argument  this  proposition  must  mean  that  protec- 
tion attracts  labor  and  capital  from  those  industries  which  create 
more  utilities  into  those  which  create  fewer  utilities.  That  is 
to  say,  the  word  "productive"  must  mean  something  more  than 
"  profitable."  The  difficulty  could  be  met  only  by  showing  that 
the  industry  which  is  profitable  from  the  standpoint  of  the  in- 
dividual business  man  is  always  a  productive  industry  from  the 
standpoint  of  the  community.  If  this  cannot  be  shown,  it  means 
that  labor  and  capital,  if  left  to  themselves,  will,  in  seeking  the 
largest  profits,  sometimes  go  into  the  less  productive  industries. 
There  would  then  be  a  possibility  that  protection  or  some  other 
form  of  government  interference  might  be  able  to  attract  labor 
and  capital  from  a  less  productive  industry,  into  which  they 
would  naturally  go  in  pursuit  of  profits,  into  a  more  productive 
industry,  from  which  they  would  naturally  have  been  excluded 
by  the  smallness  of  the  profits.  This  possibility  would  become  a 
reality  if  the  relative  profitableness  of  the  two  industries  could 
be  reversed  by  some  kind  of  government  discrimination. 

The  question  then  becomes,  Are  the  more  profitable  indus- 
tries always  the  more  productive?  Manifestly  not.  To  say 

rent  and  every  other  form  of  surplus.  A  profitable  industry  would  therefore 
be  one  which  would  yield  a  surplus  income  of  some  kind.  This  surplus  is  what 
attracts  the  director  of  industry,  and  it  is  the  surplus-producing  power  of  an 
industry  which  determines  whether  or  not  labor  and  capital  shall  go  into  it. 


462  PRINCIPLES  OF  NATIONAL  ECONOMY 

nothing  of  certain  lines  of  business  which  are  acquisitive  in 
their  nature  and  not  productive  at  all,  there  are  certain  highly 
productive  industries  which  have  very  little  power  of  attracting 
individual  enterprise. 

The  case  of  lighthouses.  To  begin  with  an  extreme  case, 
there  is  the  work  of  maintaining  lighthouses.  This  illustration 
is  chosen  not  because  it  is  supposed  to  be  typical  of  those  in- 
dustries which  are  fitted  to  receive  protection  but  solely  because 
it  serves  to  make  clear  that  there  may  be  a  productive  industry 
which  offers  no  inducements  .for  private  enterprise.  On  the  one 
hand,  this  work  has  all  the  earmarks  of  a  productive  industry. 
It  produces  a  real  utility ;  this  utility  is  of  a  materialistic  sort, 
not  moral  or  social  as  is  that  produced  by  educational  and  other 
similar  institutions,  and  it  is  produced  by  purely  mechanical 
processes.  There  is  nothing  in  the  nature  of  the  utility  pro- 
duced or  its  processes  of  production  to  distinguish  this  from  any 
money-making  business.  On  the  other  hand,  this  industry  of- 
fers no  incentive  to  private  enterprise  (that  is,  no  opportunity 
for  private  profits)  for  the  one  sufficient  reason  that  the  pro- 
ducer cannot  control  his  product.  The  lighthouse  will  shine 
upon  those  who  do  not  pay  for  it  as  well  as  upon  those  who  do. 
He  is  therefore  not  in  a  position  to  exact  a  payment  for  his 
product  corresponding  to  its  utility. 

It  will  doubtless  be  objected  that  this  is  a  case  calling  for 
government  ownership  and  operation  rather  than  protection, 
and  the  point  would  be  well  taken.  This  is  a  business  so  com- 
pletely devoid  of  opportunity  for  profitable  enterprise  that  no 
kind  of  protective  tariff  would  be  able  to  make  it  profitable. 
Nothing  but  a  subsidy  could  induce  private  capital  to  go  into 
it,  and  the  subsidy  would  have  to  cover  the  whole  cost.  In  that 
case  the  government  might  just  as  well,  it  may  be  maintained, 
own  and  carry  on  the  business.  But  the  difference  between  this 
industry  and  one  which  would  lend  itself  to  protective  measures 
is  one  of  degree  only. 

Industries  differ  widely  in  this  particular  :  whereas  one,  such 
as  the  maintenance  of  lighthouses,  produces  a  utility  that  can- 


PROTECTIONISM  463 

not  be  controlled  at  all  in  the  interest  of  the  owner,  another 
produces  a  utility  of  such  a  nature  that  the  owner  can  exact 
full  payment  from  those  who  use  it,  while  still  another  produces 
no  utility  at  all,  but  is  purely  acquisitive  in  its  nature.  An 
example  of  the  last  (not  to  come  too  near  home)  would  be  the 
medieval  baron  who  took  possession  of  a  natural  ford  or  a 
mountain  pass,  set  up  his  castle,  and  went  into  the  business 
of  collecting  toll  of  all  who  passed  that  way.1  These  three 
industries  do  not  belong  to  sharply  differentiated  classes,  but 
shade  off  gradually  into  one  another.  That  is  to  say,  there 
is  a  gradual  shading  off,  from  the  business  which  creates  utilities 
far  in  excess  of  any  amount  which  the  owner  of  the  business  can 
collect,  to  the  business  which  can  collect  a  revenue  far  in  excess 
of  any  utility  actually  created  by  it.  Here  again  we  have  a 
form  of  variation  which  makes  artificial  selection  possible,  the 
favorable  variations  being  those  industries  which  come  under 
the  former  description. 

No  complete  harmony  of  human  interests.  In  considering  this 
aspect  of  economic  life  too  much  has  been  usually  assumed  as 
to  the  harmony  of  human  interests.  Nothing  is  more  funda- 
mental in  economic  science  than  the  proposition  that  there  is 
an  antagonism  of  human  interests.  If  there  were  a  complete 
harmony  of  interests  labor  and  capital  might  be  expected  to 
seek  those  industries  which  are  most  productive  from  the  social 
standpoint.  But  aside  from  the  observable  fact  that  labor  and 
capital  do  nothing  of  the  kind,  it  is  a  matter  of  common  observa- 
tion and  experience,  confirmed  by  reflective  analysis,  that  there 

irrhis  is  a  business  to  which  the  principle  of  "charging  what  the  traffic  will 
bear"  applies  beautifully.  What  the  traffic  will  bear  is  in  this  case  determined 
by  the  superiority  of  the  ford  or  pass  in  question  over  other  available  ways 
that  are  open.  Let  us  assume  that  instead  of  merely  collecting  toll  the  baron 
spends  some  trifling  sum  in  the  improvement  of  the  passage,  still  charging 
what  the  traffic  will  bear.  His  business  then  becomes  slightly  productive,  but 
its  productiveness  is  small  as  compared  with  its  profitableness.  Then  let  us  as- 
sume that  he  gradually  increases  his  expenditures  for  the  improvement  of  the 
passage  until  the  utility  created  approximates  more  and  more  nearly  to  the 
charges  collected :  at  each  stage  of  the  process  his  business  will  represent  some 
type  actually  carried  on  among  us  today. 


464  PRINCIPLES  OF  NATIONAL  ECONOMY 

is  no  such  harmony  of  human  interests.  One  man's  interest  is 
served  by  having  the  labor  and  capital  of  the  community  di- 
rected in  one  line,  another's  by  having  them  directed  in  quite  a 
different  line.  More  than  that,  there  is  great  inequality  among 
individuals  in  the  power  of  giving  direction  to  the  industry  of 
the  community.  The  one  who  owns  land  or  capital  in  addition 
to  his  own  labor  is  in  a  better  position,  other  things  being  equal, 
to  determine  the  direction  of  business  activity  than  is  the  one 
who  owns  only  his  labor  power.  We  therefore  have  not  only 
the  certainty  that  each  individual  will  try  to  direct  business 
activity  in  the  line  most  conducive  to  his  own  interests,  and 
that  in  many  cases  his  interests  will  not  harmonize  with  those 
of  the  community,  but  also  the  certainty  that  the  power  to 
give  this  direction  differs  greatly  among  different  individuals. 
If  we  did  not  know  it  as  a  matter  of  direct  observation  and 
experience,  we  might  predict  from  these  premises  that  the 
business  activity  of  the  community  would  not,  in  all  cases,  be 
directed  in  the  most  productive  lines  and  that  therefore  it 
would  be  possible,  by  some  form  of  discrimination,  to  at- 
tract labor  and  capital  from  the  less  productive  to  the  more 
productive  industries. 

Turning  land  into  sheep  runs.  The  following  illustration  may 
add  something  to  the  concreteness  of  this  conclusion.  Let  us 
suppose  that  a  certain  tract  of  land  has  been  devoted  to  cultiva- 
tion of  a  fairly  intensive  kind  and  has  been  producing  enough 
to  pay  the  wages  of  twenty  laborers,  with  something  left  over 
for  rent.  Through  some  change  of  circumstances  the  price  of 
wool  rises,  and  it  is  found  more  profitable  to  use  the  land  for 
wool-growing.  By  turning  the  land  into  a  sheep  run,  nineteen 
of  the  laborers  may  be  dispensed  with,  and  the  saving  in  wages 
would  more  than  measure  the  difference  between  the  value  of 
the  wool  crop  and  that  of  the  present  crop,  so  that  a  larger 
surplus  would  be  left  over  as  rent.  There  is  little  doubt  that 
the  land  would  then  be  devoted  to  the  growing  of  wool.  That 
would  be  to  the  interest  of  the  landlord  and  against  the  interests 
of  the  nineteen  laborers,  but  the  landlord  is  in  a  better  position 


PROTECTIONISM  465 

than  they  to  determine  the  form  of  cultivation.  There  is  also 
little  doubt  that  this  would  be  contrary  to  the  interest  of  the 
community.  Less  wealth  would  be  produced  either  for  con- 
sumption or  for  international  trade.  Fewer  people  could  be 
supported,  or  the  same  number  would  not  be  as  well  supported 
as  formerly. 

If  the  nineteen  men  thrown  out  of  employment  cannot  find 
places  elsewhere  they  will,  since  they  want  to  live,  probably 
offer  their  labor  at  lower  wages, — enough  lower  to  enable  the 
landlord  to  get  as  much  rent  from  the  more  intensive  form  of 
cultivation  as  he  might  get  by  the  less  intensive  form.  Here  we 
have  the  somewhat  anomalous  situation  of  an  increase  in  the 
price  of  one  of  the  products  of  industry  causing  a  fall  in  the  price 
of  labor.  The  key  to  this  anomaly  is  found  in  the  fact  that 
what  is  cost  to  one  man  is  frequently  gain  to  another.  Now  in 
this  supposed  case  (which  is  not  altogether  a  supposed  case) 
there  is  little  doubt  that  some  form  of  discrimination  in  favor 
of  the  present  crop  and  against  wool  would  increase  not  only 
the  relative  share  of  the  produce  going  to  labor  but  the  absolute 
amount  of  the  produce  of  the  land  that  would  otherwise  be 
devoted  to  wool-growing. 

And  this  is  a  rule  which  works  both  ways.  In  a  community 
where  land  is  extensively  cultivated,  it  is  presumably  because 
extensive  cultivation  produces  the  best  results  from  the  stand- 
point of  the  landowner.  Any  one  of  the  following  conditions 
may  induce  him  to  change  to  intensive  cultivation :  ( i )  a  fall 
in  the  price  of  labor ;  (2)  a  fall  in  the  price  of  the  products  of 
extensive  cultivation  ;  (3)  a  rise  in  the  price  of  the  products  of 
intensive  cultivation.  There  lies  the  opportunity  for  the  protec- 
tionist. By  some  discrimination  which  would  tend  to  increase 
the  profitableness  of  the  intensive  product,  an  absolutely  larger 
and  more  valuable  product  might  be  created.  This  would  sup- 
port a  larger  number  of  people,  or  support  them  better.  They 
would  have  a  larger  number  of  products  either  for  consumption 
or  for  international  trade.  Labor  and  capital  would  have  been 
attracted  from  the  less  productive  to  the  more  productive  indus- 


466  PRINCIPLES  OF  NATIONAL  ECONOMY 

try.  Since  a  protective  tariff  is  one  means  by  which  the  relative 
profitableness  of  different  industries  may  be  changed,  it  follows 
that  a  protective  tariff  may  be  a  means  of  increasing  the  total 
product  of  the  industry  of  the  community. 

It  may  be  argued,1  however,  that  "  either  these  nineteen  men 
have  a  preferable  alternative,  under  the  free-trade  regime,  to 
wheat-raising,  or  they  have  not.  If  they  have  not  they  will 
accept  low  enough  wages,  rather  than  be  unemployed  and  have 
nothing,  so  that  the  landowner  can  realize  as  much  rent  for  his 
land  as  if  he  used  it  for  a  sheep  run.  Unless  their  efficiency  is 
thus  impaired  they  will  then  produce  as  much  wheat  as  if  they 
were  protected.  The  effect  of  freedom  from  restriction  may  mean, 
in  this  special  type  of  case,  lower  wages  and  higher  rent,  but  not 
decreased  national  wealth.  If,  however,  the  nineteen  men  have 
a  preferable  alternative  they  will  not  raise  wheat  but  will  occupy 
themselves  otherwise  at  higher  wages  than  wheat-raising  under 
free  trade  would  yield  them,  while  the  landowner  will  at  the 
same  time  realize  the  higher  rent  assumed  to  result  from  using 
his  land  as  a  sheep  run.  Free  trade  would  then  raise  rent  more 
than  it  would  lower  wages." 

To  this  it  may  be  replied  that  "in  case  the  nineteen  laborers 
decided  to  accept  lower  wages  and  continue  growing  wheat, 
there  need  not  be  any  diminution  in  the  total  product.  The 
result  would  simply  be  lower  wages,  higher  rent,  and  the  same 
total  product  as  before,  as  has  been  shown  already.  In  case, 
however,  the  nineteen  laborers  decide  to  enter  some  other  call- 
ing it  must,  of  course,  be  a  somewhat  more  remunerative  one 
than  wheat-growing  under  the  new  conditions.  It  could  not, 
however,  be  so  remunerative  as  wheat-growing  had  been  under 
the  earlier  conditions,  before  the  assumed  rise  in  the  price  of 
wool ;  otherwise  they  would  not  have  been  growing  wheat  in 
preference  to  following  this  new  occupation.  In  short,  their 
wages  are  somewhat  reduced  by  the  enforced  change  as  com- 
pared with  what  they  were  formerly  getting,  but  not  so  much 

1See  note  by  H.  G.  Brown  and  the  author's  rejoinder  in  the  Quarterly 
Journal  of  Economics  for  May,  1919,  pp.  568-572. 


PROTECTIONISM  467 

reduced  as  they  would  be  if  they  had  no  alternative  employment 
but  were  compelled  to  continue  growing  wheat  at  such  wages  as 
would  leave  the*  landowner  as  high  rent  as  he  might  get  by 
turning  his  land  into  sheep  pasture.  When  this  alternative  occu- 
pation is  open,  the  changes  assumed  would  raise  rent  and  reduce 
wages  somewhat,  but  not  so  much  as  in  the  other  case. 

"Will  these  changes  raise  rent  more  than  they  will  lower 
wages  ?  Yes,  if  we  are  thinking  of  world  economy ;  not  neces- 
sarily if  we  are  thinking  of  national  economy.  In  order  to  find 
a  satisfactory  alternative  employment  the  nineteen  laborers 
may  emigrate.  In  case  they  do,  the  national  product  will 
obviously  be  reduced  and  will  support  a  smaller  population, 
though  the  landowner's  rent  would  be  slightly  increased.  From 
the  standpoint  of  world  economy  the  increase  of  the  total  pro- 
ductivity of  industry  is  probably  hot  among  the  theoretical 
possibilities  of  protectionism ;  from  the  standpoint  of  national 
economy,  it  is.  The  protectionist  is,  rightly  or  wrongly,  com- 
monly a  nationalist,  and  from  his  point  of  view  he  finds  here  at 
least  a  theoretical  possibility." 

Free  buying  and  selling  not  always  socially  advantageous. 
The  argument  of  the  protectionist  in  its  most  general  form  is 
that  free  and  unrestricted  buying  and  selling  does  not  neces- 
sarily or  in  all  cases  result  in  the  highest  utility  to  the  nation— 
in  other  words,  that  the  market  price  is  not  an  invariable  indi- 
cator of  social  utility.  If  this  were  true,  so  that  following  the 
best  market  price  would  invariably  lead  individuals  to  promote 
the  highest  social  utility,  there  would  never  be  any  valid  ground 
for  protectionism  or  any  other  interference  with  business,  inter- 
nal or  external,  domestic  or  foreign.  If,  however,  following  the 
best  market  price,  either  in  buying  or  selling,  may  sometimes 
lead  individuals  to  do  things  which  are  not  of  the  highest  social 
utility,  there  is  at  least  a  theoretical  possibility  of  advantageous 
interference  with  the  process  of  free  buying  and  selling.  One 
could  not  optimistically  close  his  eyes  and  say  "  everything  is 
working  for  the  best"  without  any  interference  or  regulation 
whatsoever.  There  is  at  least  a  theoretical  possibility  for  im- 


468  PRINCIPLES  OF  NATIONAL  ECONOMY 

provement  through  restrictive  regulation.  The  practical  prob- 
ability, however,  is  limited  by  the  wisdom  or  disinterestedness 
of  lawmakers  and  administrative  officials.  If  they  are  no  wiser 
or  more  disinterested  than  the  average  buyer  and  seller,  that 
probability  is  very  small. 

Regulation  not  always  wise.  Whether  this  theoretical  possi- 
bility for  improvement  through  restriction  or  regulation  can  be 
realized  depends  somewhat  on  the  character  of  the  government 
and  its  officials.  The  free  trader  has  at  least  the  opportunity 
to  say  that  government  is  just  as  inefficient  as  business ;  that 
following  the  election  is  just  as  likely  to  lead  one  astray  as 
following  the  market ;  that  the  political  policy  that  will  get  the 
most  votes  is  just  as  likely  to  be  wrong  as  the  commercial 
policy  that  will  get  the  most  money.  Even  granting,  therefore, 
the  theoretical  possibilities  of  wise  protectionism,  he  might  deny 
the  probability  of  ever  realizing  these  possibilities  and  affirm 
on  the  contrary  that  the  general  experience  is  that  when  govern- 
ments attempt  to  interfere  with  freedom  of  trade  by  any  sort 
of  protective  policy,  they  usually  make  matters  worse  instead 
of  better ;  that  they  are  just  as  likely  to  protect  the  industry 
that  ought  not  to  have  protection  as  the  one  that  ought  to  have 
it ;  and  that  therefore  the  free-trade  policy  works  better  in  the 
long  run  than  the  protective  policy,  in  spite  of  all  the  theoretical 
possibilities  of  protectionism.  The  writer  adheres  to  this  opin- 
ion, not  only  with  respect  to  the  question  of  free  trade  and 
protectionism  but  with  respect  to  most  other  questions  of 
government  interference. 


DUNRAR,  CHARLES  F.  The  Theory  and  History  of  Banking  (third  edition, 
revised  and  enlarged  by  Oliver  M.  W.  Sprague).  New  York,  1917.  (The 
clearest  exposition  of  the  subject  yet  published.) 

PIEKSON,  N.  G.  Principles  of  Economics,  Part  I,  chap,  i,  §§  2-6.  New 
York,  1902.  (A  clear  exposition  of  the  theory  of  value.) 

TAUSSIG,  F.  W.  Principles  of  Economics,  Book  IV.  New  York,  1911. 
(A  most  complete  statement  of  the  principles  governing  international  trade.) 


PART  V.    DISTRIBUTION 


CHAPTER  XXXIII 

THE  LAW  OF  VARIABLE  PROPORTIONS 

The  problem  of  the  distribution  of  wealth  is  the  problem  of 
dividing  the  products  of  the  industries  of  the  nation  among  the 
various  classes.  The  claim  of  each  class  to  a  share  of  the 
wealth  is  usually  based  upon  the  claim  that  each  has  contributed 
something  to  its  production.  The  contribution  may  be  labor, 
either  mental  or  physical ;  it  may  be  capital,  or  the  results  of 
foresight  or  investing ;  or  it  may  be  land  which  the  owner  has 
appropriated  or  otherwise  come  into  possession  of,  and  which 
he  puts  to  use  or  permits  someone  else  to  use. 

The  market  value  of  services.  The  market  value  of  what 
each  has  to  offer  determines  his  share  in  the  product.  If  the 
market  value  of  labor  is  high,  the  laborer  gets  a  large  share ; 
if  it  is  low,  he  gets  a  small  share.  The  same  is  true  of  that 
which  each  has  to  offer.  Our  first  problem  must  be,  therefore, 
to  study  the  market  value  of  each  factor,  or  agent,  of  produc- 
tion in  order  to  find  out  why  the  seller  of  each  factor  gets  a 
large  or  a  small  share. 

The  income  of  each  class,  however,  is  a  flow  rather  than  a 
fund  or  a  lump  sum.  The  laborer  sells  not  himself  but  the  flow 
of  productive  energy  which  he  can  exert  during  a  given  period 
of  time.  The  capitalist,  when  he  gets  interest,  sells  not  his 
capital  but  the  flow  of  utilities  which  come  from  his  capital 
during  a  given  period  of  time.  If  the  laborer  were  a  slave  he 
might  be  sold  bodily,  and  in  that  case  he  would  bring  a  price. 
The  capitalist  and  the  landlord  may  sell  their  capital  and  their 
land  outright  for  a  price.  This  involves  a  question  of  exchange 
and  market  price.  When  they  sell  the  flow  of  utilities  which 
their  properties  yield  we  have  interest  and  rent,  which  are  ques- 
tions of  distribution.  The  following  outline  will  indicate  the 

.  471 


472  PRINCIPLES  OF  NATIONAL  ECONOMY 

relation  of  these  various  problems  to  the  general  problem  of 
valuation.1  For  convenience  the  flow  of  utilities  yielded  by 
the  various  factors  of  production  are  called  services. 

f  Consumers'  goods 
Of  goods  <  f  Land 

[  Producers'  goods  <  Capital 


VALUATION 


[  Laborers  (under  slavery) 


{Of  land  (yielding  rent) 
Of  capital  (yielding  interest) 
Of  laborers  (earning  wages) 

Why  productive  agents  are  desired.  The  reason  for  paying 
for  an  agent  of  production  is  that  it  helps  to  produce  something 
which  is  desirable.  Its  value  is  derived  from  that  of  its  product, 
or,  as  some  would  say,  a  part  of  the  value  of  the  product  is 
imputed  to  the  productive  agent.  At  any  rate,  the  producer  of 
a  desirable  thing  may  itself  be  desired,  or  a  thing  may  be  de- 
sired because  of  what  it  will  produce  as  well  as  for  its  own  sake. 
The  greater  its  product,  or  the  greater  its  contribution  to  the 
joint  product  of  a  group  of  factors,  the  greater  its  value.  It  is 
therefore  of  the  utmost  importance  that  we  find  out,  if  such  a 
thing  is  possible,  how  to  determine  the  contribution  of  each 
factor.  This  is  one  of  the  most  elusive  problems  in  the  whole 
field  of  economics.  The  student  is  requested  to  study  this 
problem  as  carefully  and  intensely  as  he  would  an  intricate 
problem  in  physics  or  chemistry. 

A  combination  of  the  factors  of  production  not  a  chemical 
combination.  In  Chapter  XVII  we  saw  the  necessity  of  a 
proper  balance  not  only  among  the  factors  of  production  but 
also  among  all  the  factors  of  national  life.  But  some  variation 
among  the  factors  of  production  must  always  be  allowed.  What 
constitutes  the  perfect  balance  depends  upon  a  number  of 
considerations  which  have  not  yet  been  discussed.  Factors  of 
production,  when  used  in  combination,  are  not  like  the  ele- 
ments in  a  chemical  reaction  or  the  colors  in  a  picture.  These 

1  Compare  note  by  the  author  on  "  The  Place  of  the  Theory  of  Value  in 
Economics,"  in  the  Quarterly  Journal  oj  Economics,  November,  1902. 


,  473 

probably  admit  of  no  variation.  The  factors  of  production 
may  always  be  combined  in  different  proportions  without 
destroying  the  result.  One  can  grow  a  hundred  bushels  of 
wheat  in  a  year  by  using  little  land  and  much  labor  or  by  using 
much  land  and  little  labor.  Which  is  the  more  economical  com- 
bination will  depend  upon  the  relative  cost  of  land  and  labor. 
Where  land  is  cheap  and  labor  dear,  it  pays  to  use  much  land 
and  little  labor ;  where  land  is  dear  and  labor  cheap,  it  pays  to 
use  little  land  and  much  labor. 

In  an  actual  chemical  combination  the  various  elements  have 
to  be  combined,  apparently,  in  fixed  proportions,  without  any 
variation  whatever.  This  is  known  as  the  law  of  definite  pro- 
portions. But  in  order  to  induce  a  given  chemical  combina- 
tion, different  substances  have  sometimes  to  be  mixed  in 
considerable  masses.  This  gives  rise  to  another  law,  which  is 
probably  as  well  understood  as  the  law  of  definite  proportions. 
It  is  of  special  importance  in  economics. 

The  law  of  variable  proportions.  Take,  for  instance,  the 
juvenile  experiment  of  mixing  vinegar  and  baking  soda  for  the 
purpose  of  producing  a  fizz.  The  actual  combination  of  mole- 
cules which  produces  the  gas  that  makes  the  bubbles  doubtless 
follows  the  law  of  definite  proportions.  But  not  all  the  mate- 
rials in  the  mixture  will  be  thus  instantly  combined.  At  the 
end  of  a  definite  period  of  time,  say  a  minute,  some  of  the  acid 
and  some  of  the  soda  will  remain  uncombined,  probably  be- 
cause a  certain  number  of  molecules  of  each  never  happened 
to  come  in  chemical  contact  with  the  requisite  molecules  of 
the  other.  The  greater  the  quantity  of  vinegar  in  proportion 
to  the  soda,  the  greater  the  probability  that  each  molecule  of 
the  soda  will  come  in  chemical  contact  with  a  molecule  of  acid. 
Therefore  the  greater  the  proportion  of  vinegar  to  soda,  the 
greater  the  proportion  of  the  molecules  of  soda  that  will  be 
used  in  the  formation  of  gas  and,  conversely,  for  the  same  rea- 
son, the  smaller  the  proportion  of  the  molecules  of  acid  that 
will  be  used.  Increase  the  soda  and  decrease  the  vinegar,  and 
the  opposite  would  follow,  for  the  same  reason. 


474   .         PRINCIPLES  OF  NATIONAL  ECONOMY 

Many  factors  at  work  in  combination.  There  are,  of  course, 
other  factors  in  the  problem,  such  as  the  size  and  shape  of  the 
receptacle  in  which  the  mixture  is  placed,  the  temperature  of 
the  mixture,  the  amount  of  shaking  or  stirring  to  which  it  is 
subjected,  as  well  as  the  time  allowed  for  the  combination  to 
take  place.  Leaving  all  the  other  factors  unchanged  except  the 
one  selected  for  experimentation,  we  get  a  result  similar  to  that 
which  we  obtain  in  some  of  the  larger  economic  combinations, 
such  as  the  application  of  labor  to  land.  In  fact,  we  are  here 
in  contact  with  a  universal  law  which  applies  to  mixtures  of 
chemicals,  as  distinct  from  chemical  combinations,  to  the  mix- 
ture of  fertilizers  in  the  soil,  and  to  every  other  combination, 
including  that  of  various  forms  of  human  talent  in  the  promotion 
of  national  greatness. 

The  manufacture  of  ether.  In  the  manufacture  of  ethers, 
alcohol  is  combined  with  acids  much  as  soda  is  combined  with 
vinegar  in  the  experiment  referred  to  above.  After  the  mix- 
ing has  taken  place,  only  a  limited  proportion  of  the  original 
ingredients  is  actually  combined.  Since  alcohol  is  expensive  and 
the  acids  are  cheap,  it  is  found  economical  to  use  large  quanti- 
ties of  acids  in  order  to  force  as  much  of  the  alcohol  as  possible 
to  combine.  The  acid  is  literally  massed  in  its  attack  upon  the 
alcohol,  in  order  that 'no  molecule  of  the  latter  may  escape. 
In  fact,  this  phenomenon  is  explained  by  the  so-called  mass 
law.  If  alcohol  were  cheap  and  acid  expensive  it  would  be 
desirable  to  force  every  molecule  of  the  acid  to  combine.  In 
order  that  as  few  as  possible  might  escape,  it  would  be  necessary 
to  mass  the  alcohol  in  its  attack  upon  the  acid.  An  economist 
might  not  improperly  call  this  an  intensive  use  of  acid  and  an 
extensive  use  of  alcohol.  Conversely,  the  rule  actually  followed 
of  massing  the  acid  upon  the  alcohol  might  be  called  an  in- 
tensive use  of  alcohol  and  an  extensive  use  of  acid.  It  is  cer- 
tainly analogous  to  massing  large  quantities  of  labor  and  capital 
upon  small  areas  of  land  in  order  to  get  the  maximum  product 
out  of  the  land,  even  though  a  relatively  small  product  per  unit 
of  labor  and  capital  is  secured. 


THE  LAW  OF  VARIABLE  PROPORTIONS 


475 


The  results  of  massing  one  ingredient  upon  another  may  be 
illustrated  by  Diagram  A,  which  is  familiar  to  all  students  of 
economics.  With  a  given  quantity  of  alcohol  let  us  mix  varying 
quantities  of  acid,  which  we  shall  represent  on  the  line  OX.  The 
quantity  of  the  product,  ether,  we  shall  represent  on  the  line  OF. 
When  a  quantity  of  acid  represented  by  the  line  OC  is  put  into 
the  mixture,  let  us  assume  that  we  get  a  quantity  of  ether  repre- 
sented by  the  rectangle  OABC.  Twice  that  quantity  of  acid 
with  the  same  quantity  of  alcohol  will  increase  the  product, 
ether,  but  will  not  double  it ;  that  is,  the  product  increases  but 
not  in  proportion  to 
the  acid.  Let  us  sup- 
pose that  a  quantity 
of  acid  represented 
by  the  line  OF  pro- 
duces, with  the  other 
ingredients,  a  quan- 
tity of  ether  repre- 
sented by  the  rec- 
tangle ODEF.  A  third  increment  and  a  fourth  would  still 
result  in  some  additions  to  the  product,  as  long,  perhaps,  as 
any  of  the  original  quantity  of  alcohol  was  able  to  escape 
the  mass  action  of  the  acid.  Eventually  the  point  would  be 
reached  where  further  increases  of  the  acid  would  add  nothing 
to  the  product. 

It  will  be  observed,  however,  that  the  addition  of  the  incre- 
ment CF  to  the  acid  did  not  add  the  rectangle  CIEF  to  the 
product.  The  addition  to  the  product  is  the  difference  between 
the  rectangle  OABC  and  the  rectangle  ODEF.  That  difference 
is  represented  by  the  rectangle  CGHF. 

The  marginal  product.  This  is  technically  known  as  the 
marginal  product  of  the  acid.  This  technical  term  does  not 
mean,  however,  that  even  the  product  CGHF  was  produced  by 
the  acid  alone;  it  merely  means  that  whatever  value  there  is 
in  the  added  product  CGHF  would  be  the  outside  limit  of  the 
value  of  the  added  ingredient  CF. 


Diagram  A 


476  PRINCIPLES  OF  NATIONAL  ECONOMY 

Air  and  gasoline  in  a  carburetor.  A  problem  something  like 
this  presents  itself  in  practical  form  in  the  use  of  air  and 
gasoline  in  an  internal-combustion  engine.  Both  are  necessary, 
but  they  may  be  mixed  in  somewhat  variable  proportions.  One 
may  use  a  rich  or  a  lean  mixture.  A  rich  mixture  is  one  rich 
in  gasoline  and  lean  in  air.  A  lean  mixture  is  one  lean  in 
gasoline  and  rich  in  air.  Combustion  itself  is  a  chemical  process 
and  presumably  follows  the  law  of  definite  proportions  rather 
than  the  law  of  variable  proportions.  But  the  mixture  of  air 

and  gasoline  which 
has  to  precede  com- 
bustion is  not  a  chem- 
ical combination  and 
follows  the  law  of 
variable  proportions ; 
K  that  is  to  say,  not  all 

N          of    both    ingredients 
actually   burns,   any 
~x     more  than  all  of  the 
Diagram  B  ingredients     in     the 

manufacture  of  ether 

are  actually  combined.  A  lean  mixture  masses  air  on  the  gaso- 
line and  enables  more  of  the  latter  to  burn,  though  much  of  the 
air  is  unburned  ;  a  rich  mixture  does  not  mass  so  much  air,  does 
not  burn  so  much  of  the  gasoline,  but  burns  a  larger  proportion 
of  the  air.  If  air  were  expensive  and  gasoline  cheap  a  rich 
mixture  would  be  more  economical.  Since  air  costs  nothing  and 
gasoline  is  expensive  a  lean  mixture  is  the  more  economical. 
The  leaner  the  mixture  that  can  be  made  to  explode,  the  greater 
the  economy  of  gasoline.  It  wastes  air,  but  that  is  not  bad 
economy.  In  short,  we  try  to  adjust  our  carburetors  so  as  to 
approximate  as  nearly  as  possible  to  the  conditions  represented 
in  Diagram  B. 

Let  us  assume  that  a  quantity  of  acid  represented  by  the  line 
OL  results,  under  certain  conditions  of  manufacture,  in  a 
quantity  of  ether  represented  by  the  rectangle  OJKL,  while  a 


THE  LAW  OF  VARIABLE  PROPORTIONS 


477 


quantity  represented  by  the  line  OQ  results,  under  similar  cir- 
cumstances, in  a  quantity  represented  by  the  rectangle  OMNQ. 
But  these  two  rectangles  are  equal ;  that  is  to  say,  with  a  quan- 
tity of  acid  equal  to  OL  one  gets  precisely  the  same  as  with  OQ. 
In  short,  the  additional  acid,  LQ,  is  thrown  away.  It  is  of  no 
use  whatever  in  that  particular  mixture,  and  yet,  the  acid  being 
all  of  uniform  quality,  it  is  as  good  as  any  of  the  rest.  The 
average  product,  however,  for  that  quantity  of  the  variable  in- 
gredient would  be  represented  by  the  rectangle  LPNQ.  It 
would  be  foolish  to  pay  that  much  for  it,  however,  or,  if  it  cost 
as  much  as  that  quantity  of  ether  would  sell  for,  it  would  be 
foolish  to  use  so  much.  If,  however,  it  cost  absolutely  nothing 
it  might  pay  to  use  that  much  or  nearly  as  much  in  order  to  be 
sure  of  getting  the  full  use  of  the  alcohol,  which  is  expensive. 

If  we  were  to  reduce  the  broken  lines  which  form  the  tops 
of  the  rectangles  in  the  two  diagrams  A  and  B  to  smooth 
curves,  we  should  get  something  like  the  following : 

As  we  increase  the 
quantity  of  one'  ingre- 
dient along  the  line 
OX,  leaving  other  fac- 
tors unchanged,  the 
average  productivity 
( that  is,  the  total  prod- 
uct divided  by  the 
number  of  units  of 
the  variable  ingredi- 
ent) gradually  falls ;  but  as  long  as  there  is  any  product  what- 
soever there  must  be  an  average  productivity  per  unit  of  that 
ingredient,  this  average  productivity  being  represented  by  the 
descending  curve  YB.  But  the  marginal  productivity  falls 
much  more  rapidly  and  may  even  become  a  minus  quantity. 
When  so  much  of  this  variable  ingredient  is  used  as  to  yield 
the  maximum  total  product,  and  further  additions  add  nothing 
to  the  total,  then  these  further  additions  are  said  to  have  a 
marginal  productivity  which  is  nil.  In  Diagram  C  the  marginal 


Diagram  C 


478  PRINCIPLES  OF  NATIONAL  ECONOMY 

product  of  varying  quantities  is  represented  by  the  line  YA.  In 
some  mixtures  further  additions  may  actually  interfere  with  the 
work  and  reduce  the  total  product.  The  curve  YAC  represents 
the  marginal  product  under  these  conditions.  In  other  mixtures 
the  excess  of  the  variable  ingredient  does  not  become  positively 
detrimental  or  destructive,  but  merely  neutral.  In  such  cases 
its  marginal  productivity  becomes  nil  but  never  a  minus  quan- 
tity. The  curve  YAC  in  Diagram  C,  in  order  to  represent  this 
class  of  cases,  would  have  to  be  redrawn.  It  should  never  fall 
below  the  line  OX. 

Reversing  the  experiment  gives  corresponding  results.  If  now 
we  change  the  experiment  and  introduce  varying  quantities 
of  the  other  ingredient  in  the  mixture  with  a  fixed  quantity  of 
the  ingredient  which  we  have  been  considering  as  the  variable 
factor,  we  shall  get  results  which  harmonize  perfectly  with 
those  which  we  have  secured  hitherto.  Returning  to  the  case  of 
alcohol  and  acid  in  the  making  of  ether,  let  us  start  with  a 
quantity  of  acid  represented  by  the  line  OL  in  Diagram  B.  Ac- 
cording to  our  assumption,  as  explained  earlier,  that  quantity 
of  acid  with  the  original  quantity  of  alcohol  produced  no  more 
ether  than  did  a  slightly  smaller  quantity  of  acid  represented  by 
the  line  OL.  If  now  we  mix  a  quantity  of  acid  equal  to  OL 
with  enough  additional  alcohol  to  bring  the  mixture  to  the  same 
proportions  as  in  the  original  mixture,  in  which  OL  acid  was 
used,  the  product,  ether,  will  increase  in  exact  proportion  to  the 
increase  in  the  alcohol,  provided,  of  course,  the  reaction  is  not 
hindered  by  the  smallness  of  the  receptacle  or  by  some  other 
extraneous  circumstance. 

To  use,  for  example,  a  fixed  quantity  of  air  for  each  ex- 
plosion, but  a  larger  quantity  of  gasoline,  would  require  a  larger 
cylinder.  Making  such  necessary  allowances,  we  can  say  that 
if  the  maximum  amount  of  air  in  a  gasoline  engine  is  used  with 
a  given  quantity  of  gasoline,  so  that  more  air  would  be  of  no 
advantage  whatever,  then  a  little  more  gasoline  could  be  in- 
troduced and  would  add  considerably  to  the  power.  There 
being  enough  air  in  the  mixture  to  get  the  maximum  combustion 


THE  LAW  OF  VARIABLE  PROPORTIONS  479 

of  gasoline,  the  power  would  for  a  time  increase  in  proportion 
to  the  gasoline.  As  more  and  more  gasoline  is  introduced,  how- 
ever, with  a  fixed  quantity  of  air,  making  the  mixture  grad- 
ually richer,  a  smaller  and  smaller  proportion  of  gasoline  will 
be  burned  because  of  a  scarcity  of  air.  If  the  mixture  is  made 
rich  enough  a  point  will  be  reached  where  further  additions  of 
gasoline  will  add  nothing  whatever  to  the  power.  The  marginal 
productivity  of  gasoline  is  then  nil.  When  the  mixture  gets  so 
rich  that  it  will  not  explode,  it  reduces  the  power,  and  the  mar- 
ginal productivity  of  gasoline  becomes  a  negative  quantity. 

The  marginal  product  of  each  factor  the  complement  of  that 
of  the  other.  The  marginal  productivity  of  each  factor  in  the 
combination  is,  it  will  be  observed,  the  complement  of  that  of 
the  other  factor.  When  the  proportions  are  such  that  the  mar- 
ginal productivity  of  one  is  nil,  that  of  the  other  is  100  per 
cent  of  the  average  product ;  that  is,  the  total  product  increases 
in  exact  proportion  as  this  factor  is  increased.  When  the  pro- 
portions are  such  that  the  marginal  product  of  one  factor  is  low, 
that  of  the  other  is  high,  the  sum  of  the  two  marginal  products 
always  equaling  the  total  product. 

When  there  are  more  than  two  factors  in  the  compound  the 
problem  becomes  more  complicated,  but  the  principle  is  the 
same.  In  such  a  case  it  is  better  to  treat  each  one  separately, 
regarding  all  the  others  as  a  bunch,  or  cluster,  and  thus  treat- 
ing them  as  a  unit.  Marshall  has  suggested  the  word  "dose"  to 
designate  a  group  of  factors.  Thus,  if  we  were  considering 
nitrogen,  phosphorus,  potassium,  and  all  other  factors  in  soil 
fertility,  we  could  treat  all  the  factors  except,  say,  nitrogen 
as  constants.  By  varying  the  nitrogen  in  the  compound  we  get 
variations  in  the  crop  yields. 

Rothamsted  experiments.  Experiments  of  this  kind  have 
actually  been  carried  on  at  the  Rothamsted  estate,  near  Lon- 
don, where  the  great  work  inaugurated  by  Sir  John  Lawes  has 
been  carried  on  for  many  years.  In  one  experiment,  for  ex- 
ample, five  plots  of  land  of  approximately  equal  fertility  were 
treated  alike  in  all  particulars  save  one.  Different  quantities 


48o 


PRINCIPLES  OF  NATIONAL  ECONOMY 


of  nitrogen  were  applied  in  the  fertilizer.  Forty-three  pounds 
were  applied  to  one  ;  86  pounds  to  another;  129  pounds  to  an- 
other; and  172  pounds  to  another.  The  following  table  shows 
the  results: 


TABLE  I1 


AVERAGE  YIELD 

GAIN  FOR 

PLOT 

FERTILIZER 

IN  BUSHELS  FOR 

43  LB.  OF 

EIGHT  YEARS 

N  1TROGEN 

No.  5 

Mixed  minerals  alone 

19 

No.  6 

Mixed  minerals  plus  43  Ib.  nitrogen 

V\ 

»5 

No.  7 

Mixed  minerals  plus  86  Ib.  nitrogen 

35s 

ll 

No.  8 

Mixed  minerals  plus  129  Ib.  nitrogen 

36§ 

«i 

No.  16 

Mixed  minerals  plus  172  Ib.  nitrogen 

37^ 

5 
8 

According  to  this  table  the  yields  show  diminishing  returns 
for  each  successive  dose  of  43  pounds  of  nitrogen.  The  gain 
on  Plot  No.  1 6  over  Plot  No.  8  was  so  slight,  being  only  five 
eighths  of  a  bushel,  as  to  be  obviously  unprofitable.  Therefore 
this  plot  was  discontinued  at  the  end  of  eight  years,  but  the 
other  four  were  continued  for  forty-eight  years,  with  the  fol- 
lowing results : 

TABLE  in 


PLOT 

YIELD  IN 
BUSHELS 

GAIN  FOR  43  LB. 
NITROGEN 

No.   q     . 

I  c 

No.  6    ... 

No.  7    . 

Tl 

Q 

No.  8    

^62 

1* 

The  number  of  plots  is  too  small  to  be  finally  conclusive,  but 
so  far  as  they  go  they  show  interesting  results.  The  first  two 
doses  of  43  pounds  each  (on  Plot  No.  6  and  Plot  No.  7)  show 

1  These  tables  are  presented  in  the  excellent  article  by  Eugene  Davenport, 
in  Bailey's  "Cyclopedia  of  American  Agriculture"  (The  Macmillan  Company, 
New  York)  ;  compare  also  the  author's  volume  "Principles  of  Rural  Economics" 
(Ginn  and  Company,  Boston,  1911),  pp.  183-184. 


THE  LAW  OF  VARIABLE  PROPORTIONS 


481 


constant  returns,  and  the  third  dose  (on  Plot  No.  8)  shows 
sharply  diminishing  returns.  Allowing  $6.50  as  a  fair  price  for 
43  pounds  of  nitrogen  and  $i  as  a  fair  price  for  a  bushel  of 
wheat  we  get  the  following  results : 


TABLE  III 


PLOT 

YIELD  IN 
BUSHELS 

GAIN  FOR 

43  LB. 

NITROGEN 

VALUE  OF 
GAIN 

COST  OF 
GAIN 

PROFIT  OR 
Loss 

No.  5  

I  c 

No.  6  

24. 

q 

So 

$6.50 

$2.50,  profit 

No.  7  

-11 

Q 

6.50 

2.50,  profit 

No.  8  

i62 

l2 

•5.7C 

6.  SO 

2.75,  loss 

If  the  price  of  wheat  were  $2  a  bushel  the  net  gains  would 
have  been  $11.50  on  Plot  No.  6,  $11.50  on  Plot  No.  7,  and  $i 
on  Plot  No.  8.  In  other  words,  the  last  dose  of  43  pounds  of  ni- 
trogen would  have  paid  a  profit  of  $i  instead  of  a  loss  of  $2.75. 
But  if  the  price  of  wheat  had  been  50  cents  a  bushel,  nitrogen 
costing  the  same,  there  would  have  been  a  loss  on  every  dose 
of  nitrogen. 

Problems  to  be  worked  out.  These  tables  present  a  number 
of  interesting  problems  which  the  student  may  work  out  for 
himself.  Taking  Tables  II  and  III  as  a  basis,  the  following 
problems  are  suggested : 

1.  With  43  pounds  of  nitrogen  costing  $6.50,  at  what  aver- 
age price  must  wheat  sell  in  order  that  the  farmer  may  come 
out  just  even,  with  neither  profit  nor  loss,  on  the  third  dose  of 
43  pounds  of  nitrogen  (Plot  No.  8)? 

2.  With  wheat  selling  at  $i  a  bushel,  at  what  price  must  43 
pounds  of  nitrogen  sell  in  order  that  the  farmer  may  come  out 
even  on  the  same  plot  with  the  same  application  of  nitrogen  ? 

We  may,  without  doing  violence  to  language,  turn  about  and 
speak  of  "applying"  doses  of  land-plus-other-factors  to  nitro- 
gen. Let  us  start  with  129  pounds  of  nitrogen,  to  which  one 
plot,  or  dose  of  land-plus-other-factors,  is  applied,  yielding  (ac- 
cording to  Tables  II  and  III)  36!  bushels.  Adding  two  more 


482  PRINCIPLES  OF  NATIONAL  ECONOMY 

plots  to  this  combination  (that  is,  spreading  our  129  pounds 
of  nitrogen  over  three  plots  instead  of  one)  we  get  a  much 
larger  crop.  Assuming  that  Plot  No.  6  is  exactly  equal  to 
Plot  No.  8  we  get  72  bushels ;  that  is,  on  Plot  No.  6  one  dose 
of  nitrogen  with  one  dose  of  land-plus-other-factors  yields,  ac- 
cording to  our  tables,  24  bushels.  Three  doses  of  43  pounds  of 
nitrogen  added  to  three  doses  of  land-plus-other-factors  should 
give  us  three  times  as  much,  which  makes  72  bushels. 

Since  three  doses  of  nitrogen  with  one  dose  of  land-plus- 
other-factors  yields  72,  it  follows  that  the  adding  of  two  doses 
of  land-plus-other-factors  adds  35^  bushels. 

A  large  number  of  experiments  of  the  same  kind  needed.  We 
have  not  plots  enough  to  carry  this  analysis  much  further,  but 
it  is  probably  clear  enough  by  this  time  that  by  varying  the 
ratios  in  which  different  factors  are  mixed  in  any  productive 
combination  we  get  varying  results.  That  being  the  case,  any 
economist  who  is  not  willing  to  consider  the  relation  of  the 
variation  in  the  factors  to  the  variation  in  the  product  is  not 
much  of  an  economist.  It  must  also  be  apparent  by  this  time 
that  the  relation  between  the  variation  in  the  quantity  of  any 
factor  in  the  combination  and  the  variation  in  the  product  must 
have  a  great  deal  to  do  with  determining  the  value  of  the  factor. 

This  method  gives  the  key  to  all  correct  valuation.  Earlier 
in  the  chapter  the  term  "marginal  productivity"  was  applied 
to  the  variation  in  the  product  which  followed  a  minute  varia- 
tion in  the  quantity  of  any  factor  in  the  combination.  In  each 
of  the  Tables  I;  II,  III,  the  figures  in  the  third  column  would 
be  called  the  marginal  product  of  nitrogen.  Objection  has  oc- 
casionally been  raised  to  the  use  of  the  word  "product"  in 
this  sense.  It  is  contended  that  even  these  increments  of  prod- 
uct are  not  in  any  sense  the  exclusive  product  of  the  43  pounds 
of  nitrogen  which  were  added  in  order  to  get  that  increment,— 
that  43  pounds  of  nitrogen,  alone  and  unrelated  to  the  other 
factors,  would  not  produce  even  the  small  increments  of  wheat 
indicated  in  the  third  column.  No  one,  of  course,  claims  that 
they  would  or  could.  It  is  not  worth  while  to  discuss  this  or 


THE  LAW  OF  VARIABLE  PROPORTIONS  483 

that  possible  meaning  of  the  word  "product"  or  "productivity." 
The  essential  thing  to  consider  is,  How  much  could  a  farmer 
afford  to  pay  for  a  given  quantity  of  nitrogen  to  be  used  in 
a  given  combination?  It  is  obvious  that  this  must  depend  on 
the  way  it  would  affect  the  crop.  How  much  more  wheat  coultf 
he  grow  by  using  more  nitrogen  or  how  much  less  would  he  grow 
by  using  less  ?  There  is  no  question  more  practical  than  this. 
It  is,  moreover,  a  question  which  must  be  raised  with  respect 
to  each  and  every  factor  in  that  combination  of  factors  called 
a  farm,  or  in  any  other  business  establishment.  It  is  in  the 
answers  to  such  questions  that  we  must  find  the  key  to  any 
clear  understanding  of  the  problem  of  the  distribution  of 
wealth,  which  is,  as  pointed  out  in  the  beginning  of  this  chap- 
ter, the  problem  of  the  valuation  of  the  factors  of  production. 


CHAPTER  XXXIV 

»  THE  PROBLEM  OF  DISTRIBUTION 

How  intensely  is  a  man's  labor  desired  ?  The  price  of  labor, 
like  the  price  of  commodities,  depends  upon  how  much  it 
is  desired  in  comparison  with  other  things.  It  is  important 
in  discussing  wages,  as  in  discussing  the  price  of  commodities, 
that  we  remember  that  it  is  not  labor  in  general,  but  specific 
units  of  labor,  which  are  purchased.  The  question  is  not  how 
intense  is  the  need  or  desire  for  labor  in  general  nor  how  great 
would  be  the  loss  if  all  labor  were  destroyed.  The  question 
is  how  intense  is  the  need  for  a  given  number  of  units  of  a 
given  kind  of  labor  or  how  great  would  be  the  loss  if  that 
given  number  of  units  were  subtracted  from  the  total  supply. 
In  the  case  of  labor,  as  in  the  case  of  commodities,  the  practical 
everyday  question  on  the  part  of  the  prospective  purchaser  is, 
How  much  do  I  need  this  particular  article  or  the  labor  of  this 
particular  man?  How  much  better  off  shall  I  be  with  the 
advantage  of  his  help  than  without  it  ? 

The  need  for  more  labor,  rather  than  the  absolute  need  for 
labor.  It  may  be  true  that  if  there  were  no  labor  of  a  given 
class,  say  that  of  ditch-diggers,  the  community  would  suffer 
terribly.  Nevertheless,  there  may  be  so  many  ditch-diggers 
that  the  addition  of  one  to  the  total  number  would  add 
very  little  to,  and  the  subtraction  of  one  would  subtract  very 
little  from,  the  well-being  of  the  community.  When  this  is 
the  case  the  labor  of  any  one  of  the  total  number  will  not 
be  very  much  desired.  Would-be  employers  will  be  somewhat 
indifferent  to  his  offers  to  help  and  to  his  threats  to  stop  work- 
ing or  to  emigrate.  The  indispensable  man,  like  the  indispen- 
sable commodity,  commands  the  high  price ;  the  man  who  can 
be  easily  spared,  like  the  superfluous  commodity,  brings  the 

low  price. 

484 


THE  PROBLEM  OF  DISTRIBUTION  485 

This  may  be  called  the  functional  theory  of  wages.  It  forms 
a  part  of  the  functional  theory  of  value  which  was  outlined 
in  a  previous  chapter.  The  function  of  a  high  price  in  the 
economy  of  the  nation  is  to  call  into  existence  a  larger  supply 
of  the  thing  for  which  it  is  offered ;  the  function  of  a  low 
price  is  to  discourage  the  production  and  reduce  the  supply 
of  the  thing  for  which  it  is  offered.  If  a  larger  supply  is  desired 
or  needed,  a  high  price  may  be  offered  as  a  means  of  getting  it ; 
in  fact,  in  a  free  country  it  is  almost  the  only  way.  In  an  unfree 
country  it  could  be  commandeered  or  conscripted.  If  a  larger 
supply  is  not  desired  or  needed,  a  low  price  is  the  means  of 
checking,  limiting,  or  reducing  the  supply.  Find  out,  in  any 
given  case,  how  much  better  off  a  community  would  be  (or 
thinks  it  would  be)  if  it  had  more  of  a  given  thing  than  it  now 
has,  and  you  have  a  fair  measure  of  the  reward  which  it  could 
afford  (or  thinks  it  could  afford)  to  pay  in  order  to  get  more. 
Stated  negatively,  find  out  how  much  worse  off  the  community 
would  be  (or  thinks  it  would  be)  if  it  were  to  lose  a  unit  or  a 
few  units  of  its  existing  supply  of  a  given  thing,  and  you  have 
a  measure  of  what  it  could  afford  (or  thinks  it  could  afford)  to 
pay  rather  than  to  incur  that  loss.  If  it  thinks  it  would  make 
a  great  difference  one  way  or  the  other,  a  high  price  will  be 
offered ;  if  it  thinks  it  would  make  very  little  difference,  a  low 
price  will  be  offered.  This  applies  to  the  price  of  labor  as 
well  as  to  the  price  of  commodities,  and  for  the  same  reason. 

In  the  case  of  labor,  as  in  that  of  commodities,  the  com- 
munity may  be  sadly  mistaken.  It  may  fail  to  appreciate 
real  merit,  and  it  may  greatly  overrate  certain  qualities  in 
either  case.  There  is  no  going  behind  the  returns  in  a  verdict 
of  this  kind  any  more  than  in  a  popular  election.  Again,  there 
may  be  members  of  the  community  who  desire  intensely  to 
possess  a  certain  commodity  or  to  hire  a  certain  kind  of  labor, 
but  who  have  not  the  wherewithal  to  purchase  or  hire  it.  They 
will  therefore  have  little  influence  on  the  price  or  the  wages. 
This  impecunious  condition  may  be  due  to  the  fact  that  others 
have  no  great  desire  for  the  labor  or  the  products  of  the  persons 


486  PRINCIPLES  OF  NATIONAL  ECONOMY 

in  question.  In  that  case  the  community  does  not  value  their 
services  very  highly,  and  therefore  their  desires  have  little 
influence  on  the  market  for  other  things  or  other  services. 

Productive  labor  is  wanted  because  of  its  product.  Our  next 
task  is  to  find  out  what  determines  how  much  the  labor  of  any 
particular  man  or  group  of  men  is  wanted.  In  the  simplest 
possible  case — that  of  a  laborer  who,  without  any  help  from 
anybody  else,  produces  a  complete  article — his  labor  is  needed 
just  as  much  as  and  no  more  than  the  article  itself  is  needed. 
The  price  of  the  article,  then,  is  his  reward.  If  he  is  not  satis- 
fied with  his  income  he  must  find  fault  with  the  price  which 
the  consumer  pays  for  the  product  (for  he  gets  the  whole 
price)  and  not  with  the  share  of  the  product  which  goes  to  him. 
This,  however,  is  a  case  so  simple  as  to  be  very  exceptional. 
Very  few  finished  products  are  produced  by  the  labor  of  a 
single  person.  One  who  goes  out  into  the  woods  and  gathers 
nuts  or  berries,  carries  them  in  vessels  which  he  has  himself 
improvised,  and  sells  them  directly  to  consumers  may  come 
under  this  class.  The  woodsman  who  goes  into  the  primeval 
forest  and  chops  wood  will  at  least  have  an  ax ;  this  ax  is 
likely  to  have  been  made  by  somebody  else.  He  will  probably 
also  need  a  team,  which  may  have  been  grown  or  produced  by 
somebody  else.  While  it  is  not  strictly  true  that  in  a  case  of  this 
kind  the  finished  product,  firewood,  is  produced  by  the  labor 
of  one  man,  still  the  problem  in  distribution  is  fairly  simple. 
If  the  woodman  has  paid  a  fair  price  for  his  ax,  the  question 
of  distribution  as  between  him  and  the  ax-maker  is  settled  and 
does  not  need  to  bother  us  any  more.  If  he  has  likewise  paid 
a  fair  price  for  his  team  and  wagon,  the  problem  of  distribution 
as  between  himself  and  the  horse-breeder  and  wagon-maker 
is  also  settled  and  need  not  bother  us  again.  Since  he  has 
paid  for  his  tools,  the  total  value  of  the  wood  which  he  cuts 
and  hauls  to  town  is  his  reward,  and  there  is  no  further  problem 
in  distribution.  But  the  farther  we  proceed  with  our  study, 
the  more  complicated  the  problem  will  become,  for  we  shall 


THE  PROBLEM  OF  DISTRIBUTION  487 

find  that  in  the  great  majority  of  cases  the  product  is  the  joint 
product  of  a  large  number  of  people. 

Goods  generally  produced  by  the  joint  labor  of  a  number  of 
persons.  We  are  sometimes  told  that  most  goods  are  socially 
produced.  This  is  a  rather  impressionistic  statement;  it  may 
do  no  harm,  but  it  is  liable  to  misinterpretation.  It  would  be 
better  to  say  that  most  goods  are  produced  by  the  joint  efforts 
of  several  persons.  The  total  reward  which  can  go  to  all  of 
them  cannot  in  the  long  run  exceed  the  total  value  of  the  fin- 
ished product  in  the  complex  cases  any  more  than  in  the  simple 
cases  of  the  berry-picker  and  the  woodchopper.  This  must  be 
divided  among  all  those  who  have  participated  in  its  production. 
The  price  of  the  loaf  of  bread  must  reward  all  those  who  have 
had  any  part  in  its  production,  including  the  baker,  the  miller, 
the  various  transportation  agencies,  and  the  farmer,  as  well 
as  the  manufacturers  of  the  farmer's,  the  baker's,  and  the 
miller's  tools,  and  so  on  back  to  the  lumbermen  and  the 
miners  who  extracted  the  raw  material  out  of  which  the  tools 
were  made. 

The  successive  division  of  labor  and  the  problem  of  distribu- 
tion. We  find  here  that  we  are  in  contact  with  what,  in  a 
previous  chapter,  has  been  called  the  division  of  labor.  This, 
as  already  pointed  out,  is  of  two  kinds :  contemporaneous  and 
successive.  We  have  the  successive  division  as  between  the 
farmer  and  the  miller,  and  as  between  the  miller  and  the  baker, 
since,  one  after  the  other,  they  work  upon  the  same  material. 
We  have  an  example  of  the  contemporaneous  division  of  labor 
as  between  the  baker  and  his  assistants,  the  mill-owner  and  his 
employees  of  various  kinds,  the  farmer  and  his  hired  men,  the 
railroad  company  and  its  employees,  and  so  on.  The  problem 
of  distributing  the  price  of  the  finished  product  among  those 
who  work  upon  the  raw  material  in  regular  succession  is  simply 
a  problem  in  the  price  of  commodities.  Thus  the  reward  of  the 
farming  group  comes  to  them  in  the  form  of  the  price  of  wheat. 
This  price  must  then  be  distributed  among  the  contempora- 


488  PRINCIPLES  OF  NATIONAL  ECONOMY 

neous  workers  on  the  farm  ;  that  is,  the  farmer  himself  and  his 
hired  men.  The  difference  between  the  price  of  wheat  and  that 
of  flour  and  its  by-products  must  furnish  the  total  reward  for 
the  milling  group  and  must  be  divided  among  them,  and  the  dif- 
ference between  the  price  of  flour  and  that  of  the  bread  must 
furnish  the  total  reward  to  be  divided  among  the  baking  group. 

All  this  is  fairly  simple  and  leads  to  no  serious  social  problem. 
Of  course  the  farmer  would  like  to  get  a  higher  price  for  his 
wheat  and  the  miller  would  like  to  get  it  at  a  lower  price,  and 
each  one  may  from  time  to  time  accuse  the  other  of  trying  to 
manipulate  the  price ;  but  this  phase  of  the  problem  of  distri- 
bution is  a  question  of  the  market  price  of  an  impersonal  com- 
modity, and  society  in  general  has  not  taken  up  the  quarrel. 
Similarly,  the  miller  would  like  to  get  a  higher  price  for  his 
flour,  and  the  baker  would  like  to  get  it  at  a  lower  price.  This 
conflict  of  interests,  however,  is  also  a  question  of  a  commodity 
price,  and  it  does  not  now  create  what  is  known  as  a  social  prob- 
lem. The  commodity  market  is  supposed  to  take  care  of  it, 
and  social  reformers  in  general  have  not  exercised  themselves 
to  any  great  extent  on  the  subject.  Occasionally,  of  course, 
someone  is  accused  of  cornering  wheat  or  manipulating  the 
price  of  flour.  Similarly,  the  baker  would  like  not  only  to  get 
his  flour  cheaper  but  also  to  sell  his  bread  at  a  higher  price. 
This,  again,  is  taken  care  of  by  the  commodity  market. 

When  bakers  are  accused  of  manipulating  prices,  as  is  not 
infrequently  charged  by  dissatisfied  consumers,  no  great  social 
problem  is  supposed  to  be  created.  There  have  been  historic 
occasions,  of  course,  when  mobs  of  irate  consumers  have 
hanged  bakers  to  their  own  lamp-posts  because  the  price  of 
bread  was  higher  than  the  consumers  liked  to  pay.  They  have 
not  always  stopped  to  consider  how  much  the  baker  had  to 
pay  for  his  flour,  or  the  miller  for  his  wheat,  or  how  hard  a 
time  the  farmer  had  had  in  growing  his  wheat,  owing  to  bad 
weather  and  pests  of  various  kinds.  All  that  the  irate  con- 
sumers realized  was  that  the  price  of  bread  was  higher  than 
they  were  accustomed  to  paying,  and  the  unfortunate  baker 


THE  PROBLEM  OF  DISTRIBUTION  489 

was  the  only  one  within  their  reach  upon  whom  they  could 
wreak  their  vengeance. 

The  division  of  the  product  among  contemporaneous  workers 
the  difficult  problem.  The  great  social  problem  of  today,  so  far 
as  it  relates  to  the  distribution  of  wealth,  is  the  problem  of 
distributing  the  price  of  the  product  among  the  contempora- 
neous workers.  Of  the  total  price  of  wheat,  how  much  should 
go  to  the  landowner  (if  he  is  a  different  man  from  the  farmer), 
how  much  to  the  farmer,  how  much  to  the  laborer,  how  much 
to  the  capitalist  (if  he  is  a  different  man  from  the  farmer)? 
Or,  again,  of  the  total  spread  between  the  price  of  wheat  and 
the  price  of  flour,  which  furnishes  the  total  reward  to  the 
milling  group,  how  much  should  go  to  the  capitalist,  how  much 
to  the  owner  of  the  mill  site,  how  much  to  the  manager,  and 
how  much  to  the  various  types  of  laborers  ?  And  so  on  through 
the  transportation  groups  and  the  baking  groups,  the  difficult 
problem  is  always  that  of  the  distribution  of  the  total  earnings 
of  the  group  among  the  contemporaneous  workers  within  it. 

What  is  meant  by  relative  productivity?  Not  much  head- 
way can  ever  be  made  in  the  study  of  this  problem  unless  we 
hold  carefully  in  mind  the  law  of  variable  proportions  as 
explained  in  the  last  chapter.  When  it  is  suggested,  for  ex- 
ample, that  each  factor  of  production  should  be  paid  for  in 
proportion  to  its  contribution  to  the  product,  any  student  who 
does  not  understand  the  law  of  variable  proportions  is  likely 
to  say  that  there  is  no  way  of  finding  out  what  each  factor 
contributes.  He  will  say,  for  example,  that  it  is  like  trying  to  find 
out  how  much  of  the  welding  is  done  by  the  anvil  and  how 
much  by  the  hammer,  or  how  much  of  the  cutting  by  the 
upper  and  how  much  by  the  lower  blade  of  the  scissors.  To 
use  this  comparison  is  to  show  that  one  does  not  understand  the 
problem.  If  one  blade  of  the  scissors  were  a  little  longer  than 
the  other,  it  would  not  require  any  so-called  metaphysical  or 
theoretical  reasoning  to  see  that  the  scissors  might  be  im- 
proved by  lengthening  the  shorter  blade.  If  two  workmen  were 
to  offer  their  services,  one  to  lengthen  the  longer  blade  and  one 


4QO  PRINCIPLES  OF  NATIONAL  ECONOMY 

to  lengthen  the  shorter  blade,  it  would  not  take  much  of  a 
theoretician  to  decide  which  workman  it  would  be  better  to 
hire.  The  workman  who  would  lengthen  the  shorter  blade 
would  add  somewhat  more  to  the  cutting-power  of  the  scissors 
than  the  workman  who  would  lengthen  the  longer  blade.  If 
blacksmiths  all  had  anvils  enough  but  were  short  of  hammers, 
or  had  hammers  enough  but  were  short  of  anvils,  they  would 
know  perfectly  well  which  to  buy.  In  the  one  case  the  seller 
of  hammers,  in  the  other  the  seller  of  anvils,  would  get  their 
money. 

Most  economic  problems,  as  pointed  out  many  times  al- 
ready in  this  volume,  relate  to  the  problems  of  more  or  less, 
of  improvement  or  deterioration,  of  readjustment  of  existing 
equipment,  organization,  etc.  If  the  blacksmith  were  ever 
called  upon  to  decide  whether  to  get  along  with  an  anvil  with- 
out any  hammer,  or  with  hammers  without  any  anvil,  there 
might  be  some  point  to  the  comparison.  The  question  which 
he  has  to  decide  is  how  to  balance  his  equipment  so  as  to 
have  hammers  and  anvils  well  adapted  to  one  another.  If  he 
were  to  find  that  he  could  improve  his  work  slightly  by 
having  another  hammer,  but  that  he  could  gain  nothing  by 
buying  another  anvil,  there  is  not  much  doubt  that  he  would 
be  more  likely  to  spend  money  on  hammers  than  on  anvils. 
He  would  not  spend  much  time  puzzling  over  the  abstract 
question  as  to  whether  hammers  or  anvils  are  the  more  pro- 
ductive. Similarly,  if  a  farmer  found  that  he  could  increase 
his  crop  more  by  having  extra  help  than  by  having  more  land, 
he  would  be  more  likely  to  offer  wages  to  someone  than  to 
offer  rent  to  someone  else.  If  farmers  generally  felt  that  way 
about  it,  wages  would  be  high  and  rent  low.  Under  the  oppo- 
site conditions  rent  would  be  high  and  wages  low. 

Diminishing  returns  from  land.  Under  the  law  of  variable 
proportions,  or  that  special  phase  of  it  known  as  the  law  of 
diminishing  returns  from  land,  it  is  actually  found  that  in  a 
community  where  there  is  an  abundance  of  good  land  but  a 
scarcity  of  labor  to  work  it,  one  or  more  laborers  added  to 


THE  PROBLEM  OF  DISTRIBUTION  491 

the  existing  number  make  a  considerable  difference  in  the 
crop.  That  is  a  sufficient  reason  for  paying  high  wages  to 
labor.  Additional  laborers  are  very  much  needed ;  the  agri- 
cultural situation  would  be  very  much  improved  by  having 
more  laborers  and  very  much  injured  if  any  were  lost.  The 
question  of  more  laborers  or  of  fewer  laborers  is  one  of 
considerable  importance. 

On  the  other  hand,  where  land  is  so  abundant  and  laborers  are 
so  few  that  it  is  difficult  to  cultivate  the  existing  land,  it  would 
not  be  of  much  advantage  to  production  to  have  a  few  more 
acres  nor  much  of  a  disadvantage  to  have  a  few  less.  The 
question  of  more  or  less  is  not,  in  this  case,  very  important. 
This  is  the  question  which  presents  itself  to  the  practical 
farmer.  The  question  as  to  which  is  absolutely  more  important, 
land  or  labor,  is  one  which  occurs  only  to  armchair  philoso- 
phers. This  would  be  in  all  respects  like  the  question  as  to 
which  does  more  of  the  cutting,  the  upper  or  the  lower  blade 
of  the  scissors. 

Shares  generally  divided  into  wages,  rent,  interest,  and  profit. 
It  simplifies  the  problem  somewhat  to  classify  those  who  take 
part  in  the  contemporaneous  division  of  labor  according  to 
the  functions  which  they  are  supposed  to  perform.  It  is  cus- 
tomary to  divide  them  into  four  main  classes.  The  first  class  is 
made  up  of  the  laborers,  who  work  either  with  their  hands  or 
with  their  heads  and  receive  their  share  in  the  form  of  wages  or 
salaries  (for  the  sake  of  simplicity,  salaries  are  in  this  chapter 
included  under  wages) ;  the  second  class  is  made  up  of  the  land- 
owners, who  furnish  the  land  and  receive  rent ;  the  third  class 
is  made  up  of  the  capitalists,  who  supply  the  capital  and 
receive  a  reward  in  the  form  of  interest ;  and  the  fourth  class 
is  made  up  of  the  independent  business  men,  who  undertake  to 
assemble  all  the  other  factors, — who  take  the  chief  risks  of  the 
enterprise  and  receive  whatever  is  left  over  after  all  the  others 
are  paid,  calling  it  profits. 

Several  functions  sometimes  performed  by  the  same  man. 
Any  or  all  of  these  functions  may  be  performed  by,  and  any  or 


492  PRINCIPLES  OF  NATIONAL  ECONOMY 

all  of  these  shares  may  go  to,  the  same  man.  In  many  small 
enterprises  the  independent  business  man  does  his  own  work 
and  is  therefore  a  laborer,  owns  his  own  land  and  is  therefore 
his  own  landlord,  and  furnishes  his  own  capital  and  is  therefore 
his  own  capitalist.  A  very  large  proportion  of  the  total  business 
of  the  nation  is  done  in  this  way.  The  typical  farm  in  the 
northern  half  of  the  country  comes  under  this  description,  as  do 
also  many  small  shops  and  stores  in  country  towns  and  a  few 
even  in  the  larger  cities.  But  even  the  farmer,  as  well  as  any 
other  business  man  who  does  a  part  of  his  own  work,  may  hire 
additional  help  and  pay  wages,  though  getting  wages  for  him- 
self. He  may  also  rent  additional  land,  though  owning  some 
land  of  his  own  and  getting  rent  for  it.  He  may  borrow  addi- 
tional capital,  though  owning  some  capital  of  his  own  and  get- 
ting interest  on  it.  In  fact,  we  can  find  every  possible  variation, 
from  the  enterprise  where  every  function  is  performed  by  the 
same  man  to  that  where  no  one  performs  more  than  a  single 
function.  An  example  of  the  latter  would  be  the  enterprise 
where  laborers  do  all  the  work  and  receive  nothing  but  wages 
or  salaries ;  where  someone  else  is  the  landowner,  furnishing 
nothing  but  land  and  receiving  nothing  but  rent ;  where  another 
man  or  group  of  men  furnishes  nothing  but  capital  and  receives 
nothing  but  interest ;  and  where  still  another  man  or  group  of 
men  assumes  the  risks  of  the  enterprise,  invests  the  borrowed 
capital  on  the  rented  land,  hires  the  labor,  buys  the  raw  mate- 
rials, and  undertakes  to  find  sale  for  the  finished  products. 
Labor,  land,  capital,  and  business  management  are  commonly 
called  the  factors  of  production.  There  are,  as  a  matter  of  fact, 
many  kinds  of  labor,  each  kind  performing  a  special  function, 
and  also  many  kinds  of  land,  capital,  and  management ;  but  it 
would  be  very  inconvenient  to  carry  on  a  discussion  if  we 
attempted  to  name  each  and  every  kind.  Therefore  it  is  cus- 
tomary to  speak  of  only  four  factors  of  production. 

How  important  is  any  factor  of  production  ?  We  may  say  in 
general  that  when  one  factor  of  production  is  oversupplied 
in  proportion  to  the  others  which  need  to  be  combined  with  it, 


THE  PROBLEM  OF  DISTRIBUTION  493 

the  question  of  getting  more  of  it  or  even  of  maintaining 
the  existing  supply  becomes  unimportant.  Accordingly  not 
much  will  be  paid  in  order  to  get  more  of  it  or  even  to  hold 
the  existing  supply.  But  when  any  factor  is  undersupplied 
in  proportion  to  the  others  which  have  to  be  combined  with  it, 
the  question  of  getting  more  of  it  or  of  holding  the  existing 
supply  becomes  very  important.  Accordingly,  a  high  price 
will  be  offered  for  it. 

This  principle  applies  not  simply  to  labor,  land,  capital,  and 
management  but  to  the  different  kinds  of  each.  If  there  is  a 
scarcity  of  skilled  labor  in  proportion  to  the  unskilled  labor 
which  has  to  be  combined  with  it,  it  becomes  very  important 
to  get  more  skilled  labor  or  at  least  to  keep  the  existing  supply. 
In  that  case  a  high  wage  will  be  offered  for  skilled  labor. 
Under  the  same  conditions  there  is,  of  course,  a  large  supply  of 
unskilled  labor  in  proportion  to  the  skilled.  It  is  therefore 
not  very  important  that  there  should  be  more  unskilled  labor 
nor  even  that  the  existing  supply  should  be  kept  from  dimin- 
ishing. Additional  unskilled  laborers,  under  these  conditions, 
add  very  little  to  the  physical  product,  and  the  loss  of  a  few 
would  subtract  very  little.  Not  much  is  likely  to  be  paid, 
under  such  conditions,  for  unskilled  labor  unless  by  philan- 
thropic persons.  The  next  question  is,  What  determines  the 
relative  supply  of  the  various  factors  of  production  ?  The 
relative  shares  of  the  total  which  will  go  to  each  factor  will 
depend  mainly  on  how  they  are  balanced  in  the  productive 
process.  The  factor  which  is  scarce  relatively  to  the  oppor- 
tunities for  its  advantageous  use  in  combination  with  the  others 
will  command  a  large  share ;  the  factor  which  is  abundant 
relatively  to  the  opportunities  for  its  advantageous  use  in 
combination  with  the  others  will  command  a  small  share. 


CHAPTER  XXXV 
WHAT  DETERMINES  THE  RATE  OF  WAGES? 

Causes  of  differences  of  wages  in  different  occupations.  Let 
us  consider,  first,  the  causes  of  the  difference  of  wages  in  dif- 
ferent occupations.  If  in  order  to  get  efficient  production  it  is 
found  necessary  to  have  a  high  degree  of  specialization,  many 
different  kinds  of  skill  will  be  found  in  the  same  establishment, 
each  kind  contributing  its  share  toward  the  production  of  the 
same  product.  Men  possessing  these  different  kinds  of  skill 
will  be  needed  in  slightly  variable  but  fairly  definite  propor- 
tions. In  the  production  of  cloth,  for  example,  spinners  and 
weavers  will  be  needed  in  fairly  definite  proportions.  If  by 
any  accident  it  could  happen  that  for  a  period  of  time  there 
were  more  spinners  than  were  necessary  to  supply  yarn  for 
the  weavers,  the  value  of  each  spinner  would  be  considerably 
reduced.  Under  these  conditions,  if  they  could  exist,  it  would 
be  literally  true  that  a  few  less  spinners  would  be  little  loss, 
provided  the  remaining  spinners  could  still  supply  all  the  yarn 
the  weavers  could  use.  On  the  other  hand,  the  labor  of  each 
weaver  would  be  of  considerable  value. 

Since  there  would  not  be  weavers  enough  to  use  all  the  yarn 
that  could  be  produced,  one  less  weaver  would  reduce  the  total 
production  of  cloth,  and  one  more  weaver  would  add  to  the 
total  production,  assuming  that  machinery  and  room  were  avail- 
able. Under  these  conditions  there  would  grow  up  in  any  free 
community  a  difference  in  wages  in  favor  of  the  weavers  and 
against  the  spinners.  This  would  be  called  the  law  of  supply 
and  demand.  This  law,  however,  rests  upon  certain  funda- 
mental advantages  and  disadvantages,  sometimes  of  a  physical 
nature  and  generally  independent  of  the  social  system  or  the 

494 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      495 

form  of  business  organization.  The  addition  to  the  total  output 
of  cloth  which  would  result  from  an  increase  in  the  number  of 
weavers  would  really  be  much  greater  than  the  addition  which 
would  result  from  an  equal  increase  in  the  number  of  spinners. 
This  would  be  a  sufficient  reason  why  a  higher  price  should  be 
offered  for  the  labor  of  weavers  than  for  that  of  spinners.  In 
the  absence  of  compulsion  this  would  be  the  only  way  of 
attracting  more  weavers  and  fewer  spinners. 

Of  course  this  condition  would  soon  correct  itself.  If  the 
wages  of  the  weavers  were  allowed  to  go  up  and  the  wages  of 
the  spinners  to  go  down,  some  of  the  spinners  would  have  an 
excellent  reason  for  changing  their  occupation.  If  they  could 
not  easily  do  so  the  oncoming  generation  of  laborers,  who  have 
to  choose  between  the  occupation  of  weaver  and  that  of  spinner, 
would  be  attracted  into  the  one  where  the  wages  were  higher, 
and  thus  restore  the  equilibrium.  But  if  wages  were  not  al- 
lowed to  readjust  themselves  and,  through  some  compulsion 
on  the  part  of  the  government  or  some  other  agency,  all 
mills  were  forced  to  pay  as  high  wages  for  spinners  as  for 
weavers  and  to  hire  all  who  applied,  then  there  would  be  no 
reason  why  the  oncoming  generation  should  go  into  the  occupa- 
tion where  they  were  most  needed.  They  would  simply  choose 
the  one  where  the  work  was  most  agreeable.  There  is  there- 
fore a  genuine  social  utility  to  be  achieved  by  the  difference  of 
wages  which  would  grow  up  under  the  law  of  supply  and  de- 
mand. It  would  tend  to  attract  laborers  into  the  occupation 
where  more  men  were  needed  and  to  discourage  them  from 
entering  the  occupation  where  more  men  were  not  needed. 
This  will  be  found  to  be  the  fundamental  reason  why  wages 
are  as  a  matter  of  fact  higher  in  some  occupations  than  in 
others.  Where  the  ordinary  processes  of  bargaining  are  not 
interfered  with,  wages  tend  to  be  high  in  those  occupations 
where  more  men  are  needed,  and  needed  badly,  and  low  in 
those  occupations  where  more  men  are  not  needed,  or  not 
needed  seriously.  The  function  of  these  differences  of  wages  is 
to  restore  the  equilibrium  between  different  occupations. 


496  PRINCIPLES  OF  NATIONAL  ECONOMY 

Cost  of  acquiring  skill.  If  there  is  some  permanent  obstacle 
in  the  way  of  a  free  choice  of  occupations,  there  may  be  a  per- 
manent difference  in  the  wages  in  different  occupations,  based 
upon  an  undersupply  of  labor  in  one  and  an  oversupply  in  an- 
other. If,  for  example,  a  certain  occupation  requires  a  kind 
of  skill  which  is  not  widely  distributed  or  easily  acquired, 
whereas  another  occupation  requires  a  kind  of  skill  which  mul- 
titudes of  people  possess  or  can  easily  acquire,  there  is  likely 
to  be  a  permanent  undersupply  of  the  one  kind  of  labor  and  a 
permanent  oversupply,  at  least  relatively,  of  the  other.  The 
cost  of  training  or  the  difficulty  and  irksomeness  of  the  neces- 
sary study  and  practice  will  serve  to  limit  the  number  of  people 
who  succeed  in  entering  the  highly  skilled  occupations. 

In  this  respect  the  cost  of  acquiring  the  necessary  skill  acts 
very  much  as  does  the  cost  of  producing  a  material  commodity. 
As  the  price  of  the  material  commodity  must  be  high  enough 
to  cover  the  cost  or  to  overcome  the  disinclination  to  the  work 
of  production,  so  the  wages  of  labor  in  a  highly  skilled  occupa- 
tion must  be  high  enough  to  serve  as  an  inducement  to  the 
labor  and  study  necessary  to  acquire  the  skill  or  to  overcome 
whatever  disinclination  there  may  be  to  the  preliminary  work 
of  study  and  practice.  If  this  cost  is  high  the  wages  must  be 
correspondingly  high ;  if  the  cost  is  very  low,  so  that  prac- 
tically no  one  is  deterred  from  entering  the  occupation,  the 
wages  will  be  correspondingly  low. 

Some  skill  is  absolutely  limited.  There  may,  however,  be  cer- 
tain kinds  of  skill  which  are  so  scarce  as  to  be  almost  inca- 
pable of  being  increased.  Certain  kinds  of  work  may  require  a 
man  of  genius  rather  than  a  man  of  mere  training.  But  in  most 
cases  it  will  be  found  to  be  a  matter  of  training.  An  indefinite 
number  of  men  could  be  trained  for  almost  any  occupation 
if  the  wages  were  only  high  enough  to  furnish  a  sufficient  in- 
ducement. This,  however,  will  depend  somewhat  upon  the 
opportunities  for  education  and  training.  Under  a  system  of 
free  public  education  the  cost  of  training  is  greatly  reduced 
and  should  naturally  greatly  increase  the  supply  of  highly 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      497 


skilled  labor.  Where  the  money  cost  of  education  is  eliminated, 
the  only  cost  remaining  is  the  irksomeness  of  hard  study.  Those 
to  whom  this  irksomeness  is  very  slight  will  naturally  be  at- 
tracted into  the  more  highly  paid  occupations.  There  may, 
however,  be  artificial  restrictions  in  the  way  of  entering  cer- 
tain well-paid  occupations.  If  a  group  of  laborers  in  one  of 
those  few  occupations  where  something  resembling  the  ap- 
prenticeship still  prevails  should  limit  the  number  of  appren- 
tices, that  would  of  course  limit  the  number  of  laborers  who 


for 


'  In  the  unskilled 
trades 


CAUSES 

OF  THE 

SCARCITY 
OF  LABOR 


In  the  skilled 
trades 


f  Fatigue 
Disinclination  to  I  . 

Long  hours 
work    because-^  _        '    , 

Loss  or    opportunity 
of  J 

[     pleasure 

Disinclination  to  f  A  high  standard  of  living 
multiply      be-<j  Late  marriages 
cause  of  [  Birth  control 

{Women 
Children 
Men  of  other  races 
Restriction  of  immigration 
Encouragement  of  emigration 

fWar 
Destruction  of  life  through^  Pestilence 

[  Famine 
Rarity  of  genius 
Expenses  of  education 

I  Disinclination  to  study 
Reduction  of  number  of  apprentices 
Closed  shop 


could  acquire  skill  enough  to  follow  the  occupation.  In  other 
cases  the  policy  of  the  closed  shop  might  be  carried  to  such 
an  extreme  as  to  reduce  the  supply  of  labor  in  the  given  occupa- 
tion and  thus  prevent  the  readjustment  of  the  supply  of  labor 
to  the  demand.  The  tendency  of  freedom,  however,  is  to  en- 
courage the  automatic  readjustment  of  the  supply  of  labor  to 
the  demand. 

These  are  the  principal  factors  which  determine  the  excess 
in  wages  of  the  skilled  trades  and  occupations  and  the  learned 


498  PRINCIPLES  OF  NATIONAL  ECONOMY 

professions  over  and  above  those  paid  in  what  are  known  as 
the  unskilled  occupations.  By  an  unskilled  occupation  is 
meant,  however,  one  which  requires  a  kind  of  skill  which  prac- 
tically everybody  can  acquire  without  much  special  study. 
There  is  skill  involved  in  the  handling  of  a  spade  or  a  wood- 
man's ax,  as  any  inexperienced  person  will  find  if  he  tries  to 
use  one  or  the  other  effectively,  but  it  is  a  kind  of  skill  which 
large  numbers  of  people  acquire  easily,  and  therefore  the  supply 
of  such  skill  is  so  great  as  to  keep  wages  down  to  the  unskilled 
level.  We  have,  therefore,  the  problem  of  finding  out  what 
determines  the  wages  of  this  general  mass  of  unskilled  labor. 
What  is  there  here  which  corresponds  to  the  cost  of  producing 
a  material  commodity  or  to  the  cost  of  acquiring  the  skill  re- 
quired in  one  of  the  well-paid  occupations  ?  The  factors  which 
take  the  place  of  cost  of  production  here  are,  first,  the  disin- 
clination to  work  and,  second,  the  disinclination  to  multiply. 

Scarcity  of  unskilled  labor.  Among  the  vigorous  European 
and  American  stocks  the  disinclination  to  work  is  not  so  very 
great.  Nevertheless,  there  is  an  appreciable  quantity  of  labor 
which  is  chronically  withdrawn  from  productive  work  by  rea- 
son of  this  factor.  That  part  of  the  leisure  class  which  is  made 
up  of  people  who  have  inherited,  acquired  by  marriage,  or 
otherwise  come  into  possession  of  sufficient  wealth  to  enable 
them  to  live  without  work  shows  this  disinclination  rather 
clearly.  There  are  also  the  chronic  loafers,  the  tramps,  and 
the  nomadic  element  among  us,  who  show  a  strong  disinclination 
to  work  and  do  so  only  under  strong  temptation. 

The  disinclination  to  multiply  is  unfortunately  strongest 
among  those  who  possess  the  most  forethought.  Those  who 
live  only  in  the  present,  who  have  no  regrets  for  yesterday  and 
no  fears  for  tomorrow,  generally  give  way  to  their  primal  im- 
pulses and  multiply  almost  as  rapidly  as  is  physiologically  pos- 
sible. Those,  however,  who  look  to  the  future,  not  only  of 
themselves  but  of  their  children,  who  foresee  the  disadvantages 
which  their  children  will  suffer  if  they  are  insufficiently 
nourished  or  inadequately  educated,  generally  have  smaller 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      499 

families  than  are  physiologically  possible.  The  multiplication 
of  numbers  among  such  people  becomes  in  part  a  moral  process 
instead  of  a  purely  animal  process.  Family-building  takes  the 
place  of  spawning.  Marriages  of  those  who  take  thought  for 
the  future  are  postponed  until  they  are  able  to  support  and 
educate  their  children. 

The  standard  of  living.  The  group  of  motives  and  factors 
which  serve  to  hold  the  procreative  instincts  in  check  is 
generally  known  as  "the  standard  of  living."  This  is  a  some- 
what technical  term  in  economics  and  requires  some  care- 
ful explanation.  Technically  the  term  " standard  of  living" 
means  the  number  of  desires  which,  in  the  average  person 
of  the  class  in  question,  take  precedence  over  that  group  of 
desires  which  result  in  the  multiplication  of  numbers.  For 
purposes  of  discussion  we  will  call  the  latter  group  of  desires 
the  domestic  instincts.  When  the  domestic  instincts  act  power- 
fully and  without  opposing  motives  sufficient  to  hold  them  in 
check,  the  individual  will  undertake  the  support  of  a  family  be- 
fore he  is  assured  of  a  sufficient  income  to  satisfy  any  but  the 
most  elementary  desires.  Under  these  conditions  he  is  said  to 
have  a  low  standard  of  living.  In  his  case  there  are  very  few 
other  desires  which  take  precedence  over  the  domestic  instincts. 
The  individual  of  whom  that  is  true  will  accordingly  marry 
and  undertake  the  support  of  a  family  as  soon  as  he  has  suf- 
ficient income  to  satisfy  that  other  small  group  of  desires.  In 
other  cases  a  large  number  of  other  desires  take  precedence 
over  the  domestic  instincts.  An  individual  of  whom  this  can 
be  said  will  not  marry  and  undertake  the  support  of  a  family 
until  he  feels  reasonably  certain  of  being  able  to  satisfy  all 
these  other  desires.  He  is  said  to  have  a  high  standard  of 
living ;  that  is,  an  expensive  standard. 

If  we  can  imagine  a  community  to  which  immigrants  from  the 
outside  do  not  come  and  in  which  the  average  unskilled  laborer 
has  a  high  standard  of  living,  we  shall  have  a  community 
in  which  the  average  laborer  will  not  marry  and  undertake  the 
support  of  a  family  until  he  is  sure  of  wages  high  enough  to 


500  PRINCIPLES  OF  NATIONAL  ECONOMY 

satisfy  a  large  number  of  desires.  If  the  average  individual, 
however,  has  a  low  standard  of  living  he  will  marry  and  under- 
take the  support  of  a  family  on  low  wages ;  that  is,  wages  that 
are  just  high  enough  to  secure  him  the  means  of  satisfying  a 
small  group  of  desires.  If  the  unskilled  laborers  of  the  com- 
munity have  a  high  standard  of  living  the  average  age  of  mar- 
riage will  be  a  little  higher  and  the  average  size  of  the  family 
a  little  smaller,  so  that  the  rate  of  multiplication  will  be 
materially  slower  than  would  be  the  case  if  they  had  a  low 
standard  of  living.  The  rate  of  multiplication  being  slower,  the 
oncoming  supply  of  labor  is  less,  and  in  the  succeeding  genera- 
tions laborers  will  thus  be  able,  through  the  smaller  supply,  to 
continue  to  get  high  wages.  If  wages  are  low  to  begin  with 
they  will  refuse  to  marry  or  will  defer  marriage  to  such  a  late 
age  as  to  reduce  the  supply  of  labor  and  thus  force  wages  up 
to  a  level  which  will  enable  them  to  .maintain  their  standard. 
If  the  standard  of  living,  however,  is  low  and  the  rate  of  mul- 
tiplication correspondingly  high,  wages  tend  to  continue  low. 
Even  if  wages  are  temporarily  high,  unless  the  standard  of 
living  should  rise  quickly,  the  rate  of  multiplication  will  so 
increase  through  early  marriages  and  large  families  as  to  over- 
supply  the  labor  market  and  force  wages  down  again  until  they 
are  just  sufficient  to  maintain  the  low  standard  of  living. 

Standard  of  living  affects  the  price  of  labor  as  cost  of  produc- 
tion affects  the  price  of  a  commodity.  From  the  foregoing  dis- 
cussion it  will  be  seen  that  the  standard  of  living  affects  the 
wages  of  the  general  mass  of  unskilled  labor  in  precisely  the 
same  way  as  the  cost  of  producing  a  material  commodity  affects 
its  price.  Wages  must  be  sufficient  to  overcome  the  disinclina- 
tion to  marry  and  produce  families.  This  disinclination,  how- 
ever, is  the  joint  product  of  a  number  of  conflicting  desires. 
In  an  elementary  sense  there  is  a  strong  inclination  to  marry 
rather  than  a  disinclination,  but  the  inclination  to  marry  is 
held  in  check  by  the  desire  of  the  individual  for  consumers' 
goods  of  his  own.  If  he  realizes  that  with  a  family  to  support 
he  will  have  a  little  less  money  to  spend  on  himself,  or  that 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      501 

if  his  family  is  too  large  he  will  have  less  for  each  one  of  them 
and  may  not  be  able  to  educate  them,  such  considerations  will 
create  a  disinclination  which  may  more  than  balance  the  in- 
clination toward  marriage.  A  real  safeguard  against  low  wages, 
therefore,  is  a  high  standard  of  living,  which  will  check  some- 
what the  tendency  toward  early  marriages  and  large  families. 
How  far  this  should  go  is  always  a  serious  question.  No  one 
advocates  so  low  a  standard  as  would  cause  multiplication  to 
take  place  as  rapidly  as  is  physiologically  possible.  If  that 
were  the  case  marriages  would  take  place  at  the  age  of  puberty, 
and  women  would  be  continually  engaged  in  the  functions  of 
motherhood  as  long  as  childbearing  was  possible.  Nobody 
would  favor  that.  Everybody  favors  some  kind  of  standard 
of  living  and  some  postponement  of  marriage.  It  is  only  a 
question  as  to  how  high  a  standard  and  how  much  postponement 
is  desirable. 

The  law  of  population.  This  brings  us  to  the  great  law  of 
population,  which  has  generally  been  associated  with  the  name 
of  Malthus.  The  law  which  Malthus  worked  out  and  which 
has  never  been  successfully  refuted,  though  many  attempts 
have  been  made,  may  be  briefly  stated  as  follows : 

1.  Every  species  of  plant  and  animal  has  the  physiological 
power  to  multiply  faster  than  its  means  of  subsistence  will 
permit.  Subsistence  is  the  factor  which  actually  limits  numbers. 

2.  The  physiological  power  of  human  increase  is  also  so 
great  that  if  it  should  operate  without  moral  or  social  restraints 
of  any  kind,  it  would  carry  population  to  such  limits  that 
vice  or  misery  or  both  would  begin  to  thin  out  the  surplus 
population  and  thus  operate  as  a  check  upon  further  increase. 

3.  Owing  to  the  law  of  diminishing  returns,  a  larger  number 
of  people  cannot,  in  any  given  state  of  civilization  and  the  in- 
dustrial arts,  be  so  well  provided  for  from  the  produce  of  a 
restricted  area  of  land  as  a  smaller  number  can. 

4.  There  is  a  strong  natural  instinct  which  inclines  the  mem- 
bers of  our  species  to  the  multiplication  of  numbers,  and  unless 
this  is  counteracted  by  other  motives,  it  will  lead  to  an  increase 


502  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  population  beyond   the   limits   within  which   comfortable 
subsistence  is  possible. 

5.  This  natural  instinct  is,  however,  opposed  and  held  in 
check  by  several  contrary  motives,  not  the  least  important  of 
which  is  the  desire  for  the  goods  which  one  has  been  accus- 
tomed to  consume,  coupled  with  the  perception  on  the  part  of 
each  head,  or  would-be  head,  of  a  family  that  a  larger  number 
of  children  means  a  smaller  share  of  the  necessaries,  comforts, 
and  luxuries  of  life  for  each  one ;  and  this  keeps  the  rate  of 
increase  far  below  that  which  is  physiologically  possible. 

6.  How  rigidly  the  increase  of  numbers  is  held  in  check  by 
this  motive  depends  upon  people's  ideas  as  to  what  is  essen- 
tial, in  the  way  of  incomes,   to  their  happiness, — in  other 
words,  upon  their  standard  of  living.    It  is  the  standard  of 
living,  therefore,  which  determines  the  rate  of  increase  of  pop- 
ulation, given  the  amount  of  wealth  and  the  possibilities  of 
production.    It  plays  the  same  part  in  determining  the  supply 
of  labor  which  the  cost  of  producing  commodities  plays  in 
determining  their  supply. 

Refinement  of  the  law  of  population.  While  this  general  law 
has  never  been  successfully  refuted,  and  is  accepted  by  every 
economist  of  any  standing,  some  refinements  have  been  found 
necessary.  For  example,  it  makes  a  great  deal  of  difference  in 
what  stratum  of  society  the  increase  in  population  takes  place. 
There  might  be  such  a  thing  as  a  considerable  increase  in  the 
total  population  that  would  result  in  a  considerable  increase  in 
the  rate  of  wages  of  unskilled  labor.  If  we  could  double  or 
treble  or  quadruple  the  number  of  people  in  what  are  known 
as  the  employing  classes  (that  is,  the  professional  men  and, 
more  particularly,  the  successful  entrepreneurs  and  independent 
business  men),  the  competition  among  these  business  men 
would  take  several  forms.  In  order  to  equip  and  man  their 
establishments  they  would  have  to  bid  against  one  another  to 
get  labor  and  also  to  sell  their  products.  This  would  tend  to 
bring  up  the  price  of  labor  and  to  bring  down  the  price  of 
products, — in  other  words,  to  leave  a  narrower  margin  of 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      503 

profits  on  which  business  men  would  have  to  live.  For  example, 
recent  immigrants  into  the  Philippine  Islands  from  America 
have  not  been  unskilled  laborers  but  skilled  laborers,  engineers, 
technicians,  and  business  men.  This  has  added  somewhat  to 
the  population  of  the  Philippines,  but  at  the  same  time  it  has 
increased  the  demand  for  unskilled  laborers  and  has  therefore 
tended  to  improve  their  condition.  Whether  the  increase  in 
the  higher  economic  grades  comes  through  immigration  of  these 
grades,  a  higher  birth  rate  among  the  educated  classes,  or  better 
systems  of  education,  the  results  are  much  the  same. 

Effect  of  immigration.  We  began  our  discussion  of  the 
effect  of  the  standard  of  living  by  assuming  a  country  to  which 
no  immigrants  came.  However  high  the  standard  of  living  of 
the  native  laborers  or  however  strong  the  tendency  of  the  edu- 
cational and  social  system  to  raise  the  standard  of  living,  if 
large  numbers  of  immigrants  with  a  low  standard  kept  coming 
in,  it  would  keep  the  standard  down  to  a  low  level.  At  any  rate 
the  oversupply  of  unskilled  labor  would  tend  to  keep  wages 
down.  Their  coming  would  tend  to  make  business  conditions 
easier  for  men  who  need  to  employ  unskilled  labor,  but  to  make 
conditions  very  much  harder  for  the  unskilled  laborers  who  are 
already  there.  If,  however,  the  immigrants  resemble  those 
Americans  who  go  to  the  Philippine  Islands  (that  is,  if  they 
belong  to  the  skilled,  the  professional,  and  the.  employing 
classes),  they  tend  to  make  conditions  easier  for  the  unskilled 
laborers  but  harder  for  the  skilled,  the  professional,  and  the 
employing  classes  who  are  already  there. 

Noncompeting  groups.  This  brings  in  the  principle  known 
by  various  names,  such  as  the  principle  of  noncompeting  groups 
or  that  of  joint  demand.  In  the  case  of  material  commodi- 
ties it  sometimes  happens  that  two  or  more  articles  have 
to  be  combined  to  supply  the  same  demand, — such  as  sugar 
and  cranberries,  bread  and  butter,  etc.  If  sugar  is  so  scarce 
and  so  high  that  people  cannot  afford  to  buy  it,  there  will  be 
less  demand  for  cranberries;  but  if  sugar  is  abundant  and 
cheap,  so  that  everybody  can  afford  to  buy  it,  there  will  be 


504  PRINCIPLES  OF  NATIONAL  ECONOMY 

an  increased  demand  for  cranberries.  In  the  field  of  produc- 
tion we  get  much  better  illustrations  than  in  the  field  of  con- 
sumption. It  frequently  happens  that  several  different  kinds  of 
material  have  to  be  combined  in  the  making  of  a  single  prod- 
uct,— coal  and  iron  ore,  for  example,  in  the  making  of  steel. 
If  coal  were  scarce  and  very  expensive,  and  other  kinds  of  fuel 
likewise,  the  best  iron  ore  in  the  world  would  be  of  very  little 
use  and  would  have  to  sell,  if  it  sold  at  all,  at  a  very  low  price. 
With  cheap  and  abundant  coal  the  value  of  ore  beds  tends  to 
rise.  The  same  principle  applies  to  different  types  of  labor. 
Managerial  skill,  technical  skill,  and  manual  labor  have  to  be 
combined  in  the  production  of  many  manufactures.  If  there 
were  no  manual  labor  to  be  had,  managerial  skill  and  technical 
skill  would  be  of  very  little  use ;  with  an  abundant  and  cheap 
supply  of  manual  labor  these  other  forms  of  skill  become 
enormously  valuable  to  their  possessors.  Conversely,  with  no 
managerial  and  technical  skill  to  go  with  it,  manual  labor  would 
be  worth  very  little  in  our  industries;  with  an  abundance  of 
managerial  ability  and  technical  skill  large  quantities  of  man- 
ual labor  can  be  utilized  and  many  industries  can  start.  The 
first  and  most  important  refinement  to  be  made  in  the  doctrine 
of  population,  therefore,  is  to  point  out  that  the  question  of 
absolute  number  is  not  the  only  question  involved, — that  the 
question  of  the  occupational  distribution  of  numbers  must  be 
taken  into  account.  When  the  increase  in  numbers  takes  place 
among  the  unskilled  laborers,  it  works  to  their  disadvantage  but 
to  the  advantage  of  those  who  belong  to  noncompeting  groups, 
say  the  technically  skilled  and  those  possessing  managing 
ability ;  but  when  the  increase  in  numbers  takes  place  in  the 
higher  economic  classes,  it  works  to  the  advantage  of  the 
unskilled  laborers. 

Summary.  The  discussion  thus  far  may  be  summarized 
as  follows : 

i.  The  wages  of  any  person  will  depend  upon  how  much  his 
labor  is  desired.  The  wages  of  any  class  will  depend  upon  how 
important  it  is  thought  to  be  that  there  should  be  more  laborers 


.WHAT  DETERMINES  THE  RATE  OF  WAGES?      505 

of  that  class,  or  that  there  should  not  be  any  less.  High  wages 
indicate  a  strong  desire  and  low  wages  indicate  a  weak  desire 
to  have  more  of  a  certain  kind  of  work  done. 

2.  Different  kinds  of  labor  usually  have  to  be  combined  in 
fairly  definite  but  somewhat  variable  proportions.    If  there 
happens  to  be  more  of  a  certain  kind  than  will  combine  satis- 
factorily with  the  existing  supply  of  the  other  necessary  kinds, 
the  oversupplied  kind  will  not  be  strongly  desired.    There  will 
be  no  great  need  for  more  of  it  and  therefore  no  strong  reason 
for  paying  high  wages.    The  kind  of  labor,  however,  which  is 
undersupplied  will  be  much  more  needed.    There  will  be  a 
strong  reason  for  desiring  more  of  it,  and  the  only  way,  in  a 
free  society,  to  get  more  of  it  is  to  offer  high  inducements. 
High  wages  are  a  powerful  inducement. 

3.  Labor  which  requires  a  kind  of  skill  that  is  difficult  to 
acquire  will  usually  be  scarce,  relatively  to  the  need  for  it. 
Wages  must  be  high  enough  to  induce   men  to  make   the 
necessary  effort  in  order  to  fit  themselves  for  the  work. 

4.  Unskilled  labor  is  usually  abundant,  being  limited  only  by 
the  disinclination  to  work  and  the  standard  of  living  or  the  cost 
of  bringing  up  children.    Where  the  cost  is  high,  or  the  un- 
willingness great,  wages  must  be  high  enough  to  induce  men  to 
marry  and  bring  up  children.    When  the  cost  is  low  and  there 
is  very  little  unwillingness  to  overcome,  wages  may  be  low  be- 
cause men  will  bring  up  children  on  very  low  wages  and  thus 
keep  the  supply  of  labor  intact. 


CHAPTER  XXXVI 
THE  ORGANIZATION  OF  LABORERS 

Comparative  advantages  in  bargaining.  It  has  long  been 
recognized  that  in  the  ordinary  bargaining  process  between 
laborers  and  their  employers,  the  laborers  are  at  a  disadvan- 
tage. The  reasons  why  they  are  at  a  disadvantage  have  been 
variously  stated.  It  is  argued,  for  example,  that  the  capitalist 
can  wait  longer  than  the  laboring  man,  and  thus  wear  the  labor- 
ing man  out  and  force  him  to  give  in  and  accept  the  capitalist's 
terms.  The  capitalist,  it  is  said,  having  an  accumulation  of 
wealth,  can  live  on  that  accumulation.  There  is  doubtless 
something  in  this  argument,  though  it  is  easy  to  exaggerate  it. 
If  the  capitalist's  accumulation  is  in  the  form  of  buildings  and 
machinery,  it  is  difficult  to  see  how  he  can  live  on  these  things. 
He  might  borrow  money  on  the  basis  of  the  security  which  they 
furnish,  and  with  this  borrowed  money  buy  consumers'  goods. 

It  is  not  so  much  the  fact  that  he  is  a  capitalist  as  it  is  the 
fact  that  he  has  greater  borrowing  facilities  that  gives  him  this 
advantage.  If  instead  of  owning  capital  he  owned  consumers' 
goods  in  considerable  quantities, — if  he  owned,  for  example, 
his  own  house,  if  he  had  insurance  policies  or  deposits  in  the 
savings  bank, — he  would  have  the  same  or  even  greater  waiting 
power  than  he  has  when  he  owns  capital  of  equal  commercial 
value.  It  is  therefore  frequently  argued  that  one  remedy  for 
this  situation  is  for  the  laborer  himself,  as  far  as  possible,  to 
acquire  his  own  home,  life-insurance  policies,  and  deposits  in 
savings  banks.  This  would  help,  at  any  rate,  to  give  him  the 
power  to  wait  and  would  thus  help  to  even  up  the  advantages 
in  bargaining.  But  the  objection  to  this  is  the  simple  observed 
fact  that  the  laborers  have  less  property  of  any  kind  than  their 
employers ;  otherwise  they  would  not  be  laborers.  This  being 


THE  ORGANIZATION  OF  LABORERS  507 

the  fact,  it  does  not  help  much  to  point  out  what  the  laborer 
might  do  if  the  facts  were  otherwise. 

Another  reason  given  for  the  disadvantage  of  the  laborer  in 
the  bargaining  process  is  that  he  is  usually  less  skillful  in  the 
matter  of  bargaining  than  his  employer.  His  expertness  is  more 
likely  to  consist  of  manual  skill  than  of  skill  in  bargaining.  The 
entrepreneur  is  peculiarly  a  bargaining  person.  He  literally 
bargains  for  everything.  If  he  borrows  capital,  if  he  rents  land, 
if  he  buys  raw  materials,  secures  transportation  rates,  and  hires 
labor,  or  organizes  a  selling  department, — every  part  of  his 
work  has  to  do  with  bargaining.  He  becomes,  therefore,  the 
bargainer  par  excellence.  Those  whose  expertness  lies  in  other 
directions  are  therefore  at  a  disadvantage  when  they  come 
to  deal  with  him.  This  argument  is  undoubtedly  correct  as  far 
as  it  goes. 

Employers  are  few,  but  laborers  are  numerous.  The  third 
fact,  however,  which  sometimes  militates  to  the  disadvantage 
of  the  laborer  and  the  advantage  of  the  employer  is  that 
laborers  are  sometimes  numerous  and  employers  are  few. 
Where  this  is  the  case  there  is  more  competition  among  laborers 
for  jobs  than  among  employers  for  men.  Wherever  this  fact 
does  not  exist,  there  is  no  great  advantage  on  the  part  of  the 
employer.  One  conspicuous  example  would  be  that  of  domestic 
servants.  The  employer  in  this  case  doubtless  has  more  power 
to  wait  than  the  maid.  The  employer  may,  on  the  average,  be 
somewhat  more  intelligent  than  the  maid.  Nevertheless,  he  has 
no  great  advantage  in  bargaining,  for  the  simple  reason  that 
there  are  approximately  as  many  employers  as  there  are  em- 
ployees. Observation  seems  to  show  that,  in  this  country  at 
least,  it  is  far  more  difficult  for  an  employer  to  find  a  maid  than 
for  a  maid  to  find  an  employer.  When  they  meet  to  arrange 
terms,  there  is  no  visible  advantage  on  the  side  of  the  em- 
ployer or  disadvantage  on  the  side  of  the  employee.  In  fact,  it 
sometimes  appears  that  the  advantage  and  disadvantage  are  of 
the  opposite  kind.  There  is  at  least  a  reasonable  number  of 
cases  where  the  employee  is  very  independent  and  must  be 


508  PRINCIPLES  OF  NATIONAL  ECONOMY 

placated  by  an  almost  obsequious  attitude  on  the  part  of  the 
employer.  A  multitude  of  other  illustrations  might  be  given, 
which  in  the  aggregate  seem  rather  important,  though  as  com- 
pared with  the  number  of  cases  where  the  employer  is  at  an 
advantage  and  the  employee  is  at  a  disadvantage  they  are  prob- 
ably insignificant.  Nevertheless,  one  can  safely  say  that 
wherever  laborers  are  few  as  compared  with  the  number  wanted, 
their  bargaining  power  is  great,  their  wages  high,  and  their 
conditions  satisfactory. 

It  appears,  therefore,  that  the  fundamental  and  permanent 
remedy  for  the  laborer's  disadvantage  in  bargaining  would  be 
such  a  reduction  of  the  number  of  laborers  and  such  an  increase 
of  the  number  of  employers  as  would  give  the  labor  at  least  an 
equal  advantage  in  the  bargaining  process.  This  remedy,  how- 
ever, like  all  fundamental  and  permanent  remedies,  is  slow  and 
difficult  to  bring  about.  It  is  slow  in  the  sense  that  it  would 
take  a  generation  or  so  to  bring  it  about;  it  is  difficult,  not 
for  economic  but  for  political  and  social  reasons.  Economically 
it  is  perfectly  easy ;  politically  it  is  difficult  simply  because  it 
would  be  difficult  to  get  a  majority  of  the  voters  to  vote  for 
such  a  policy.  It  might  take  several  generations  before  a  ma- 
jority vote  could  be  secured  for  a  constructive  policy  of  this 
kind.  Meanwhile  the  existing  laborers  would  still  be  at  a 
disadvantage  and  in  need  of  relief.  It  would  be  cold  comfort 
to  them  to  point  out  that  future  generations  of  laborers  may 
be  exceedingly  well  off  if  the  right  policy  is  adopted.  There- 
fore they  are  inclined  to  take  matters  into  their  own  hands 
and  adopt  a  more  speedy  remedy,  even  though  it  be  less  funda- 
mental and  less  permanent. 

Collective  bargaining.  This  remedy  is  that  which  is  known 
as  collective  bargaining  as  against  individual  bargaining.  In 
a  trade  where  laborers  are  oversupplied,  each  individual 
laborer  is  in  a  weak  position  because  he  can  easily  be  spared. 
He  is  almost  superfluous;  he  is  certainly  not  indispensable. 
If  he  stops  working  or  leaves  the  community  he  will  scarcely 


THE  ORGANIZATION  OF  LABORERS  509 

be  missed.  Industry  will  go  on  approximately  as  well  without 
him.  Because  there  is  a  superfluity  of  labor  his  place  can  easily 
be  filled.  Under  such  conditions  his  bargaining  power  is  very 
weak ;  he  is  practically  compelled  to  take  whatever  terms  are 
offered  to  him.  His  kind  of  labor  as  a  whole,  however,  may  be 
absolutely  indispensable.  While  he  as  an  individual  could 
be  spared  without  much  inconvenience,  the  members  of  his 
trade  are  absolutely  indispensable,  when  considered  as  a  whole. 
If  they  were  all  to  stop  work,  business  would  have  to  stop ; 
if  they  were  all  to  emigrate,  the  whole  business  in  which  they 
were  engaged  would  be  permanently  destroyed. 

The  group  may  be  indispensable,  while  the  individual  could 
easily  be  spared.  The  fundamental  principle  involved  in  the 
trade-union  policy  of  the  present  is  the  substitution  of  the  in- 
dispensable group  as  a  bargaining  unit  for  the  dispensable 
individual.  Since  the  group  as  a  whole  is  indispensable  to  in- 
dustry, if  they  can  bargain  as  a  whole  the  laborers  are  in  a 
strong  position.  As  a  group  they  cannot  possibly  be  spared. 
The  difficulty,  however,  has  always  been  to  hold  the  group  to- 
gether and  get  them  to  bargain  absolutely  as  an  indispensa- 
ble group  and  to  refrain  from  making  individual  bargains 
independently  of  group  action. 

The  trade  union.  This  underlying  principle  has  given  rise 
to  one  of  the  largest  social  movements  of  modern  times; 
namely,  the  organization  of  laborers.  Several  types  of  organi- 
zation, however,  have  entered  the  field,  and  there  is  still  some 
rivalry  among  them.  In  the  first  place,  there  is  the  trade 
union  pure  and  simple ;  this  is  an  organization  of  the  men  who 
ply  the  same  trade  (that  is,  the  men  whose  work  is  of  the 
same  kind).  The  Brotherhood  of  Locomotive  Engineers  is  an 
example  of  this  kind  of  organization. 

The  industrial  union.  In  the  second  place,  there  is  the  indus- 
trial union,  which  includes  all  the  laborers  plying  various  trades 
who  are  engaged  in  the  same  general  line  of  industry.  The 
United  Mine  Workers  of  America  is  one  example  of  this  type 


510  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  organization;  the  Brotherhood  of  Railroad  Trainmen  of 
America,  which  attempts  to  take  in  all  the  railroad  workers, 
is  another. 

The  labor  union.  A  third  type  of  organization  is  what  may 
be  called  the  labor  union,  which  attempts  to  organize  all 
laborers,  of  whatever  trade  or  occupation  and  in  whatever  in- 
dustry they  may  be  engaged.  The  Knights  of  Labor  were  an 
organization  of  this  type,  and  lately  the  Industrial  Workers  of 
the  World  have  attempted  a  similar  type  of  organization. 

The  federation  of  trade  unions.  The  trade  union  seems  in 
recent  years  to  have  been  somewhat  stronger  than  either  the 
industrial  union  or  the  labor  union,  but  it  has  felt  the  need  of 
some  larger  and  more  nearly  universal  type  of  organization. 
This  has  been  secured  by  the  federation  of  trade  unions  into  a 
national  organization  known  as  the  American  Federation  of 
Labor.  This  type  of  organization  recognizes  that  each  trade 
has  certain  special  and  peculiar  interests  of  its  own  and  there- 
fore has  a  special  reason  for  organizing  as  a  trade.  This  is  a 
principle  which  seems  to  be  ignored  by  the  labor  union  espe- 
cially. By  organizing  the  special  and  peculiar  interests  of 
each  trade  the  federation  becomes  stronger  at  this  most  vital 
point.  By  federating  the  different  trades  for  the  furthering  of 
the  interests  which  are  common  to  all  it  becomes  stronger  at 
another  important  point;  namely,  with  respect  to  the  need 
of  concerted  action  on  a  nation-wide  scale. 

The  attempt  to  ignore  the  special  interests  of  each  trade  and 
to  unite  all  workers,  of  whatever  trade  or  industry,  into  one 
universal,  undifferentiated  organization  has  had  certain  ideal- 
istic features  which  make  a  strong  appeal  to  men  of  idealistic 
temperament.  There  is  the  attempt  to  ignore  any  possible 
rivalry  of  interests  among  different  classes  of  laboring  men. 
While  this  sounds  attractive  it  hardly  accords  with  the  ob- 
served facts.  It  is  perhaps  a  little  more  humanitarian  in  its 
philosophy  but  a  little  less  effective  in  its  methods  of  work.  It 
might  be  compared  to  an  attempt  to  create  a  unified  nation  by 
ignoring  alJ  local  interests  and  internal  conflicts,  whereas  the 


THE  ORGANIZATION  OF  LABORERS  511 

federation  idea  might  be  compared  to  a  system  of  government 
which  would  recognize  local  and  state  interests  and  allow  a  cer- 
tain amount  of  self-government  to  the  local  units,  but  which 
would  unite  them  all  under  a  national  government  for  the 
carrying  out  of  national  aims. 

Necessity  of  controlling  the  supply  of  labor  in  its  own  market. 
As  in  all  attempts  in  all  fields  to  bargain  to  better  advantage 
for  the  sale  of  either  a  commodity  or  a  service,  an  organization 
of  laborers  must  get  control  of  the  supply  of  the  service  which 
it  is  trying  to  sell.  This  leads  to  the  policy  of  the  closed  shop ; 
that  is,  the  policy  under  which  none  but  members  of  the  organi- 
zation are  to  be  employed  in  a  given  shop  or  series  of  shops. 
If  any  considerable  number  of  outsiders  are  permitted  to  work 
in  these  shops,  they  will  of  course  bargain  independently  and 
be  in  a  weak  position.  That  very  fact  also  tends  to  weaken 
the  power  of  the  organization  in  the  bargaining  process.  Unless 
the  organization  can  control  the  supply  of  labor  which  is  per- 
mitted to  work  in  a  given  trade, — can  withdraw  them  as  a  body 
or  put  them  back  as  a  body, — it  will  find  itself  unable  to  secure 
advantageous  terms.  If,  for  example,  there  were  so  many  non- 
union laborers  available  as  to  make  the  employer  more  or  less 
indifferent  as  to  whether  the  members  of  the  union  worked  as  a 
body  or  withdrew  as  a  body,  he  would  not  be  likely  to  pay  much 
attention  to  the  demands  of  the  union.  If  he  knew  that,  even 
though  the  union  as  a  body  withdrew  from  his  shop,  he  could 
easily  fill  places  with  nonunion  men  the  bargaining  power  of 
the  union  would  at  once  be  destroyed. 

The  closed  shop.  An  absolutely  closed  shop  is  very  difficult 
to  maintain  when  there  is  a  surplus  of  laborers  available  for  a 
given  occupation.  So  long,  for  example,  as  indefinite  numbers 
of  foreign-born  laborers  can  be  had  for  the  recruiting  of  the 
ranks  of  any  trade,  nothing  but  the  most  drastic  measures  on 
the  part  of  the  organization  of  laborers  can  preserve  its  control. 
It  is  sometimes  necessary,  from  their  point  of  view,  to  use  a 
good  deal  of  persuasion,  and  this  persuasion  is  sometimes  of  a 
rather  severe  nature  and  often  virtually  amounts  to  compulsion. 


512  PRINCIPLES  OF  NATIONAL  ECONOMY 

The  strike.  The  strike  has  become  one  of  the  drastic  meth- 
ods through  which  an  organization  of  laborers  may  enforce 
its  control  over  the  labor  supply.  Theoretically  the  strike  is 
merely  the  suspension  of  work  by  the  laborers  of  a  given  trade 
or  group  of  trades.  If  there  were  no  waiting  list  and  no  avail- 
able mass  of  laborers  from  which  to  fill  the  shops  which  the 
strikers  have  vacated,  a  mere  quiet  suspension  of  work  would 
be  all  that  would  be  involved  in  a  strike.  This,  however,  is  sel- 
dom the  situation.  There  is  generally  such  an  oversupply  of 
labor,  especially  of  the  unskilled  kinds,  as  to  force  the  strikers 
to  do  something  else  besides  the  mere  suspension  of  work.  They 
must  manage  somehow  to  keep  others  from  taking  their  places. 
This  may  take  the  form  of  peaceful  picketing  and  persuasion ; 
it  may  take  the  form  of  threats ;  and,  in  extreme  cases,  it  may 
take  the  form  even  of  violence  and  terrorism.  It  is  to  be 
remembered,  however,  that  threats,  violence,  and  terrorism  are 
necessary,  even  from  the  laborer's  point  of  view,  only  when 
there  is  an  oversupply  of  labor  available  for  the  jobs  of  the 
strikers.  The  ultimate  cure  for  this  situation  is  that  which 
was  suggested  earlier  in  this  chapter, — such  a  thinning  out  of 
the  number  of  laborers,  especially  in  the  unskilled  occupations, 
as  to  reduce  the  number  of  men  to  an  approximate  equality 
with  the  number  of  jobs. 

In  justification  of  the  strike,  even  when  accompanied  by 
threats  and  violence,  it  is  sometimes  euphemistically  stated  that 
the  laboring  man  has  a  right  to  his  job  and  no  other  laboring 
man  has  a  right  to  take  it  away  from  him.  Or,  as  it  is  some- 
times put,  the  labor  unionist's  eleventh  commandment  is,  Thou 
shalt  not  steal  thy  neighbor's  job.  This,  however,  is  not  quite 
complete ;  it  really  should  read,  Thou  shalt  not  steal  thy 
neighbor's  job  unless  he  is  a  nonunion  man,  and  in  that  case 
thou  shalt  go  after  it  with  a  club. 

Numbers  make  for  weakness  in  bargaining  but  for  strength  in 
fighting  and  voting.  One  large  fact  which  complicates  the 
whole  problem  of  the  organization  of  laborers  and  their  methods 
is  that  those  who,  because  of  their  numbers,  are  weak  in  the 


THE  ORGANIZATION  OF  LABORERS  513 

bargaining  process  become,  by  virtue  of  those  same  numbers, 
strong  in  the  making  of  public  opinion  and  in  the  election  of 
candidates  for  office.  Roughly  speaking,  one  may  say  that  the 
more  people  there  are  of  a  certain  individual  type,  the  weaker 
they  are  in  the  process  of  individual  bargaining  but  the  stronger 
they  are  in  making  public  opinion  and  controlling  elections. 
It  is  pretty  certain,  therefore,  that  they  will  use  their  strength 
in  controlling  public  opinion  and  politics  to  compensate  for 
their  weakness  in  the  bargaining  process.  Whatever  our  views 
on  the  purely  ethical  aspects  of  such  questions  as  the  closed 
shop,  the  strike,  picketing,  threats,  and  violence,  we  must 
realize  once  and  for  all  that  in  a  republic,  where  majorities 
control,  there  is  absolutely  nothing  to  be  done  about  it.  Those 
who  realize  that  they  are  weak  in  the  process  of  peaceful  in- 
dividual bargaining  but  strong  in  other  ways  can  be  depended 
upon  to  use  that  strength  to  their  own  advantage.  On  the  other 
hand,  those  who,  because  their  numbers  are  few,  are  very  strong 
in  the  process  of  peaceful  and  individual  bargaining  must 
realize  that  politically  they  are  very  weak,  since  they  have  very 
few  votes.  It  would  be  as  futile,  therefore,  to  expect  that  when 
there  is  an  oversupply  of  labor  the  laboring  men  will  go  on  in- 
definitely, bargaining  individually  for  jobs,  accepting  the  dis- 
advantages under  which  they  labor,  and  refraining  from  using 
the  strength  of  numbers  in  their  own  interests,  as  to  expect 
that  the  tides  should  cease  to  rise  and  fall  or  the  winds  to  blow. 
When  a  numerous  class  realizes  that  its  numbers  count 
against  it  in  bargaining  but  for  it  in  fighting  and  voting,  it  is 
pretty  certain,  sooner  or  later,  to  try  to  win  back,  by  fighting 
or  by  voting,  what  it  has  lost  in  bargaining.  Therefore  there 
are  two  very  good  reasons  why  we  should  try  to  maintain  a 
balanced  population.  By  a  well-balanced  population  is  meant 
one  in  which,  among  other  things,  each  occupational  group 
is  no  more  numerous  than  is  necessary  to  combine  with  other 
occupational  groups.  If,  for  example,  there  are  no  more  spin- 
ners than  are  needed  to  supply  yarn  for  the  weavers,  no  more 
of  both  than  are  required  to  combine  satisfactorily  with  other 


514  PRINCIPLES  OF  NATIONAL  ECONOMY 

groups,  no  more  unskilled  laborers  than  are  necessary  to 
work  in  combination  with  the  skilled  laborers,  no  more  of 
both  than  are  necessary  to  work  in  combination  with  salesmen, 
accountants,  managers,  etc.,  the  population  is  well  balanced 
so  far  as  these  groups  are  concerned.  When  this  is  the  case 
no  group  will  be  at  a  disadvantage  in  the  bargaining  process. 
That  is  one  reason.  The  other  is  that  no  group  would  have  the 
motive  or  the  power  to  win  back,  by  fighting  or  by  voting,  what 
it  was  losing  by  bargaining.  Such  a  balancing  of  our  population 
would  eliminate  the  more  acute  phases  of  our  labor  problem. 


CHAPTER  XXXVII 
THE  RENT  OF  LAND 

Rent  the  price  paid  for  the  use  of  land.  The  rent  of  land  orig- 
inally meant  the  price  paid  for  its  use  during  a  given  period  of 
time.  Its  meaning  is  now  extended  to  cover  the  income  which 
the  owner  derives  from  it,  whether  he  uses  it  himself  or  lets  it 
out  to  someone  else.  The  selling  price  of  land  is  the  price  paid 
as  a  lump  sum  for  its  permanent  possession,  which  includes  its 
use  through  all  future  time.  Its  value  is  the  present  estimate  of 
all  its  future  utilities,  whether  they  are  sold  or  kept  by  the 
present  owner  and  his  heirs.  There  is  thus  a  very  close  connec- 
tion between  the  value,  or  price,  of  land,  on  the  one  hand,  and 
its  rent,  on  the  other.  The  rent  is  the  value,  or  the  price,  of  the 
flow  of  utilities  which  it  yields  during  a  given  period  of  time, 
such  as  a  month  or  a  year.  Both  the  value  and  the  rent  of  land 
come  under  the  general  law  of  value ;  both  are  determined  by 
utility  and  scarcity,  as  is  the  case  with  all  forms  of  value. 

Why  rent  is  paid.  The  utility  of  land  is  of  various  kinds  and 
degrees.  In  some  cases  land  yields  its  utilities  directly  and  is 
thus  a  consumers'  good,  or  at  least  resembles  consumers'  goods 
in  this  respect.  Parks,  pleasure  grounds,  and  residence  sites 
yield  their  utilities  in  this  way  instead  of  yielding  tangible  prod- 
ucts. In  other  cases  land  yields  its  utilities  indirectly  ;  that  is,  it 
produces  or  helps  to  produce  tangible  products  which*  are  them- 
selves useful.  In  these  cases  the  utility  of  land,  like  that  of  all 
producers'  goods,  is  a  derived  utility.  Its  utility  is  derived  from 
that  of  its  products. 

There  are  great  differences  in  the  utility  or  desirability  of 
different  pieces  of  land,  whether  they  be  used  for  one  purpose 
or  for  another.  In  one  of  the  chapters  on  land  (Chapter  XVI) 
it  was  pointed  out  that  these  differences  are  mainly  in  location 


516  PRINCIPLES  OF  NATIONAL  ECONOMY 

and  fertility.  The  other  qualities  which  make  land  usable,  such 
as  extension  and  solidity,  all  land  possesses  in  equal  degree,  so 
that  these  qualities  do  not  make  one  piece  more  desirable  than 
another ;  but  in  the  qualities  of  location  and  fertility  there  are 
great  differences,  and  these  differences  powerfully  affect  its 
desirability  and  its  value. 

Differences  in  the  desirability  of  land.  The  problem  of  rent 
may  be  approached  in  several  ways.  In  the  first  place,  we  may 
concentrate  our  attention  on  the  differences  in  rent  or  the 
differences  in  the  desirability  of  different  pieces  of  land.  There 
is  always  land  somewhere  the  use  of  which  can  be  had  free  of 
charge.  Nevertheless,  men  will  be  found  paying  high  rents  for 
other  land  which  is  more  desirable  than  that  which  can  be  had 
free  of  charge.  The  fact  that  it  is  more  desirable  than  the  free 
land  is  what  makes  it  command  a  rent.  In  the  case  of  land 
which  is  useful  for  production  only,  its  desirability  is  of  course 
determined  by  its  productivity.  He  who  secures  the  use  of  a 
superior  piece  of  land  can  either  produce  more  at  the  same  cost 
than  would  be  possible  on  the  kind  of  land  which  is  free  or  he 
can  produce  the  same  amount  at  lower  cost.  This  difference  in 
productivity  gives  its  owner  a  rent  when  he  cultivates  or  uses 
it  himself,  and  enables  a  tenant  to  pay  rent  in  case  the  land  is 
worked  by  a  tenant. 

Location  as  an  element  in  desirability.  That  the  location  of  a 
piece  of  land  will  affect  its  productivity  will  be  clear  to  anyone 
who  will  consider  that  the  cost  of  transporting  goods  to  market 
is  a  part  of  the  cost  of  production.  If  one  farm  is  so  badly 
located  with  respect  to  railroads  and  markets  that  it  costs  ten 
cents  a  bushel  to  haul  the  wheat  to  the  nearest  railroad,  while 
another  farm  is  so  well  located  that  the  hauling  costs  only  two 
cents  a  bushel,  it  is  evident  that  if  the  two  farms  are  equally 
fertile  the  former  will  be  worth  considerably  less  than  the  latter. 
The  difference  of  eight  cents  a  bushel  in  the  cost  of  haulage 
would  make  a  difference  of  $2.40  per  acre  if  the  average  crop  on 
the  two  farms  were  thirty  bushels  per  acre.  A  tenant  could 


THE  RENT  OF  LAND  517 

afford  to  pay  that  much  more  for  the  well-situated  than  for  the 
badly  situated  farm. 

If  land  were  so  abundant  that  the  badly  situated  farm  in 
the  above  illustration  and  other  land  equally  desirable  could 
be  had  rent-free,  and  if  it  were  the  most  desirable  land  which 
could  be  had  free,  then  land  of  this  type  might  be  called  mar- 
ginal land,  or  land  on  the  margin  of  cultivation.  By  marginal 
land  is  meant  that  which,  under  the  conditions  of  the  market, 
men  would  be  induced  to  cultivate  if  it  cost  them  nothing,  but 
which  they  would  abandon  and  leave  unused  if  they  were 
required  to  pay  even  the  lowest  conceivable  rent  for  its  use. 
Under  these  conditions  the  rent  of  the  well-located  farm  of 
the  above  illustration  would  be  $2.40  per  acre,  assuming  that 
wheat  is  the  only  crop. 

The  margin  of  cultivation.  Aside  from  the  productivity  of 
the  land,  two  other  factors  help  to  determine  the  margin  of 
cultivation.  These  are  the  demand  for  products  and  the  de- 
mand for  labor,  or  the  opportunities  for  the  employment  of 
labor.  An  increase  in  the  demand  for  products  will  gener- 
ally bring  land  into  cultivation  which  would  otherwise  have 
remained  idle,  whereas  a  decrease  in  the  demand  for  products 
will  cause  some  poor  land  to  be  abandoned  which  would  other- 
wise have  remained  in  use.  The  margin  of  cultivation  may 
change,  however,  for  other  reasons.  When  the  prairies  of  the 
West  were  brought  into  cultivation  the  margin  was  extended 
in  that  direction,  but  this  threw  so  many  products  on  the  mar- 
ket that  some  of  the  less  productive  lands  of  New  England 
could  no  longer  be  advantageously  cultivated.  Much  of  this 
land  was  abandoned,  and  the  margin  of  cultivation  was  con- 
tracted in  this  section.  The  extension  of  the  margin  on  the 
Western  frontier  and  the  contraction  on  the  rocky  hillsides 
of  New  England  tended  to  counteract  one  another.  There 
was,  however,  at  the  same  time  a  growing  demand  for  prod- 
ucts, so  that  the  expansion  in  one  direction  more  than  made 
up  for  the  contraction  in  the  other.  In  other  words,  the  total 


5i8  PRINCIPLES  OF  NATIONAL  ECONOMY 

production  actually  increased,  despite  the  diminution  on  some 
of  the  New  England  farms. 

Factors  which  extend  the  margin  of  cultivation.  An  increase 
in  the  supply  of  labor  which  is  seeking  employment,  unless 
counteracted  by  a  corresponding  increase  in  the  demand  for  it 
elsewhere,  will  generally  extend  the  margin  of  cultivation  and 
cause  land  to  be  cultivated  which  would  otherwise  remain 
idle.  This  problem  may  be  approached  from  two  points  of 
view.  In  the  first  place,  idle  land  may  be  regarded  as  an 
opportunity  for  idle  men.  When  the  supply  of  labor  increases 
faster  than  the  demand  for  it,  the  number  of  idle  men  in- 
creases. Some  of  these  idle  men  are  then  crowded  out  onto 
the  idle  land.  Even  if  they  are  not  actually  thrown  out  of  work, 
the  results  are  much  the  same.  There  is  always  a  current  of 
migration  from  the  farms  to  the  towns.  When  the  labor  mar- 
ket in  the  towns  is  overcrowded,  country  boys  find  fewer 
inducements  to  leave  the  country.  Therefore  they  must  per- 
force remain  on  the  farms  and  cultivate  the  land.  When 
larger  inducements  are  offered  in  the  towns,  more  of  them 
leave  the  farms  and  less  land  can  then  be  cultivated. 

Another  way  of  approaching  this  problem  is  by  considering 
the  wages  of  farm  labor.  When  this  labor  can  be  had  at  a 
low  cost,  some  land  can  be  cultivated  profitably  which  could 
not  be  if  the  same  kind  of  labor  cost  more.  Wherever  farm 
labor  is  cheap  we  find  that  there  is  little  land  going  to  waste 
except  the  very  poorest;  where  farm  labor  is  expensive  and 
hard  to  secure  we  find  fairly  good  land  actually  going  to 
waste.  Only  the  best  land  can  be  profitably  cultivated  by 
expensive  labor.  It  must  be  remembered,  however,  that  labor 
is  not  necessarily  expensive  merely  because  wages  are  high. 
Very  efficient  labor  may  be  cheap  even  though  it  is  paid  high 
wages,  and  very  inefficient  labor  may  be  expensive  even  though 
it  works  for  low  wages.  With  this  explanation  it  ought  to  be 
clear  that  with  a  given  demand  for  farm  products  poorer  land 
can  be  cultivated  if  labor  is  abundant  and  cheap  than  would  be 
profitable  if  it  were  scarce  and  dear. 


THE  RENT  OF  LAND  519 

Different  grades  of  land.  A  partial  illustration  of  the  doc- 
trine of  rent  can  be  found  in  a  study  of  the  following  table 
and  the  explanation  which  follows  it.  It  is  only  a  partial 
explanation,  however,  because  it  omits  the  law  of  diminish- 
ing returns.  This  lack  will  be  corrected  in  the  subsequent 
illustration  and  explanation. 


Grade 

A, 

yielding 

1000  units 

of 

product  to 

100  units 

of 

labor 

Grade 

B, 

yielding 

900  units 

of 

product  to 

100  units 

of 

labor 

Grade 

C, 

yielding 

800  units 

of 

product  to 

100  units 

of 

labcr 

Grade 

D, 

yielding 

700  units 

of 

product  to 

100  units 

of 

labor 

Grade 

E, 

yielding 

600  units 

of 

product  to 

100  units 

of 

labor 

Let  us  assume  a  miniature  community  possessing  five  grades 
of  land,  as  indicated  in  the  above  figure.  On  the  best  grade  of 
land,  which  is  of  limited  extent,  100  units  of  labor  will  produce 
1000  units  of  product ;  on  the  next  grade,  900  units  of  product ; 
on  the  next,  800  units  of  product ;  etc.  If  the  demand  of  the 
community  were  for  only  1000  units  of  product,  and  there  were 
only  100  units  of  labor,  only  the  best  grade  of  land  could  be 
used.  Until  it  was  all  in  use  there  would  be  no  rent.  But  if 
the  population  were  to  increase  so  that  there  was  an  increase 
in  the  demand  for  products  and  also  in  the  supply  of  labor, 
Grade  A  would  not  continue  to  be  sufficient.  If,  for  example, 
the  demand  were  to  increase  so  that  1500  units  of  product 
were  needed,  some  of  it  would  have  to  be  produced  on  the 
second  grade  of  land,  which  would  thus  be  the  marginal  land.' 
On  this  marginal  grade,  however,  each  unit  of  labor  would 
produce  only  9  units  of  product,  whereas  on  the  best  grade  it 
would  produce  10  units.  Clearly  each  producer  would  rather 
work  on  Grade  A  than  on  Grade  B.  Because  of  this  preference 
he  could  be  persuaded  to  pay  something  for  the  privilege  of 


520 


PRINCIPLES  OF  NATIONAL  ECONOMY 


working  on  Grade  A.  Approximately  i  unit  of  product  for 
each  unit  of  labor  would  be  paid  for  the  privilege  of  farming  on 
Grade  A.  An  owner  of  a  portion  of  Grade  A  who  worked  it 
himself  would  be  better  off  than  an  owner  of  a  portion  of 
Grade  B.  This  excess  of  his  income  over  that  of  an  equally 
good  worker  on  Grade  B  would  be  rent  just  as  truly  as  though 
he  received  it  in  cash  from  a  tenant. 

If  the  demand  for  products  continues  to  increase  until  it 
requires  2  500  units  of  product,  some  of  Grade  C  will  have  to  be 
brought  into  use.  This  will  now  be  the  marginal  grade.  On 

Grade  C,  however, 
each  unit  of  labor  pro- 
duces only  8  units  of 
product.  Rather  than 
work  on  this  land,  pro- 
ducers will  be  willing 
to  pay  something  for 
the  privilege  of  work- 
ing on  either  Grade  A 
or  Grade  B.  Each  unit  of  labor  will  be  willing  to  pay  ap- 
proximately 2  units  of  product  for  the  privilege  of  working 
a  portion  of  Grade  A,  or  i  unit  for  the  privilege  of  working 
a  portion  of  Grade  B,  rather  than  be  forced  to  cultivate  land 
of  Grade  C.  In  either  case  it  will  have  as  much  left  as  it 
would  have  if  it  got  the  whole  of  the  product  on  Grade  C 
without  any  deduction  for  rent.  If  we  go  on  assuming  an  in- 
crease in  the  population,  and  a  consequent  increase  in  the 
demand  for  products  and  in  the  number  of  units  of  labor 
available  for  the  cultivation  of  land,  we  shall  find  each  of  the 
grades  D  and  E  in  succession  brought  into  cultivation,  and 
the  rent  going  up  correspondingly  on  every  grade  except  the 
marginal  one. 

Differences  in  productivity.  The  differences  in  the  productiv- 
ity of  land  may  be  represented  cr  illustrated  by  the  preceding 
diagram  if  it  is  understood  that  lands  of  different  grades  are 
ranged  along  the  line  OX,  with  the  most  productive  piece  of 


THE  RENT  OF  LAND  521 

land  at  the  point  O  and  absolutely  barren  land  at  the  point  X, 
with  every  variation  between.  If  we  measure  the  productivity 
of  the  different  parcels  on  the  line  OY,  the  curve  YBX  may  be 
called  the  productivity  curve.  When  a  total  product  repre- 
sented by  the  surface  OA  YBC  is  to  be  produced,  only  the  land 
between  O  and  C  will  be  required.  That  at  the  point  C  will  be 
marginal  land,  and  all  between  C  and  X  will  be  unused.  The 
line  BC  represents  the  productivity  of  the  marginal  land,  and 
the  surface  YBA  will  represent  the  rent  on  all  the  other  land 
in  use. 

Relation  of  diminishing  returns  to  rent.  This  explanation, 
however,  is  incomplete,  as  any  explanation  of  rent  is  incomplete 
unless  it  takes  into  account  the  law  of  diminishing  returns. 
Even  on  the  best  land — in  fact,  on  any  grade  of  land — dif- 
ferent applications  of  labor  and  capital  produce  different  re- 
sults. After  a  certain  quantity  of  labor  and  capital  has  been 
applied  to  the  cultivation  of  a  given  piece  of  land,  further 
increases  in  the  labor  and  capital  do  not  yield  proportionately 
increased  returns.1  If  this  were  not  true  it  would  never  be 
necessary  to  cultivate  any  but  the  best  grade  of  land.  If,  for 
example,  200  units  of  labor  on  Grade  A  of  the  land  described 
in  the  figure  on  page  519  would  produce  2000  units  of  product, 
that  would  be  better  than  to  spread  it  over  both  Grade  A  and 
Grade  B,  where  it  would  produce  only  1900  units  of  product. 
Again,  if  300  units  of  labor  applied  to  Grade  A  would  produce 
3000  units  of  product,  and  400  units  of  labor  4000  units  of 
product,  and  so  on  indefinitely,  we  should  have  what  are  called 
constant  as  opposed  to  diminishing  returns.  If  constant  re- 
turns could  be  secured  indefinitely,  as  stated  above,  it  would 
never  be  advisable  to  cultivate  any  land  but  Grade  A  of  our 
illustration. 

But  the  simple  and  well-known  fact  is  that  increasing  appli- 
cations of  labor  and  capital  to  the  same  land  do  not  yield  con- 
stant returns,  much  less  increasing  returns.  Instead  of  200 
labor  units'  yielding  2000  units  of  product  on  Grade  A,  and 

aAs  shown  in  Chapter  XXXIII,  on  The  Law  of  Variable  Proportions. 


522  PRINCIPLES  OF  NATIONAL  ECONOMY 

300  labor  units'  yielding  3000  units  of  product,  it  is  more 
likely  that  200  units  would  yield  1800  units  of  product,  and 
300  units  2400  units  of  product,  or  some  such  quantity.  If 
that  were  the  case  it  would  be  better  to  take  Grades  B  and  C 
into  cultivation  rather  than  to  put  all  the  increasing  labor 
supply  onto  Grade  A.  Unless  something  like  this  rate  of  dimi- 
nution in  the  returns  should  result,  the  inferior  grades  would 
never  come  into  use  at  all. 

The  value  of  land  to  the  community.  Thus  far  we  have  been 
considering  the  differences  in  the  productivity  of  different 
grades  of  land  as  the  reason  why  rent  is  paid  and  as  the 
factor  which  determines  how  much  rent  is  paid  for  land  of  a 
given  grade.  Another  way  of  viewing  it,  which  leads  to  the 
same  result,  is  to  consider  how  much  better  off  the  community  is 
when  a  given  piece  of  land  is  in  cultivation  than  when  it  is  not. 
If  there  is  an  abundance  of  uncultivated  land  in  every  way  as 
good,  location  and  everything  considered,  as  the  piece  of  land 
in  question,  the  only  result  of  withdrawing  the  latter  from  culti- 
vation would  be  to  bring  into  cultivation  an  equal  quantity  of 
other  land.  In  such  a  case  the  community  loses  nothing  when 
this  piece  of  land  is  withdrawn  from  cultivation  nor  would  it 
gain  anything  if  it  were  brought  back  into  cultivation.  There 
being  more  land  of  this  grade  than  can  be  cultivated,  some 
labor  must  be  withdrawn  from  other  land  when  this  piece  of 
land  is  cultivated. 

If,  however,  there  is  a  scarcity  of  land  of  the  grade  of  the 
piece  in  question,  there  is  certain  to  be  a  decrease  in  the 
total  production  of  the  community  if  it  is  withdrawn  from 
cultivation,  and  an  increase  when  it  is  brought  back  into  culti- 
vation. If  it  is  withdrawn  from  cultivation  the  labor  and  tools 
which  were  used  in  cultivating  it  must  now  find  employment  on 
other  land.  If  they  go  onto  poorer  land,  such  as  has  been  hith- 
erto uncultivated,  their  product  will  be  less.  The  production  of 
the  community  is  decreased  by  the  amount  of  the  difference 
between  the  product  on  the  piece  of  land  in  question  and  the 
product  on  the  poorer  land.  If  the  labor  and  tools  go  onto  land 


THE  RENT  OF  LAND  523 

which  is  already  under  cultivation,  they  merely  add  to  the  num- 
ber of  laborers  and  tools  already  on  that  land  and  carry  the 
margin  of  cultivation  a  little  farther.  They  will  add  something 
to  the  product  from  that  land,  but  not  an  amount  equal  to  the 
total  product  formerly  produced  on  the  land  which  is  now 
thrown  out  of  cultivation.  The  difference  between  the  total 
amount  produced  on  the  land  now  thrown  out  of  cultivation  and 
the  amount  which  the  labor  and  tools  could  add  to  the  product 
from  other  land  measures  the  loss  to  the  community  which 
occurs  when  the  piece  of  land  in  question  is  thrown  out  of 
cultivation.  This  difference,  however,  corresponds  to  the  rent 
of  the  land. 

The  law  of  rent.  The  rent  of  a  piece  of  land,  therefore,  is 
determined  by  the  difference  between  what  can  normally  be 
produced  upon  it  and  what  an  equal  amount  of  labor  and  capi- 
tal can  produce  in  less  advantageous  positions  still  open  to 
them.  These  less  advantageous  positions  may  be  found  either 
by  going  onto  the  inferior  lands  still  uncultivated  or  by  crowd- 
ing onto  land  already  cultivated.  The  rent  of  a  piece  of  land 
is  thus  seen  to  correspond  pretty  closely  to  its  value  to  the 
community  or  the  nation.  It  represents  the  net  advantage 
which  the  community  gains  when  the  land  is  in  use,  or  the  net 
loss  which  the  community  sustains  when  it  is  not  in  use.  This 
does  not  necessarily  mean,  however,  that  the  rent  of  a  piece  of 
land  represents  the  owner's  contribution  to  the  community  or 
the  nation,  unless  it  can  be  shown  that  it  was  the  owner  that 
made  the  land  productive. 

Price  of  land  derived  from  rent.  It  is  a  common  fallacy  to 
suppose  that  the  selling  price  of  land  determines  its  rent,  the 
fact  being  that  the  rent  determines  the  price  of  land.  Land 
that  is  so  well  located  or  that  has  such  a  high  degree  of  fertility 
as  to  yield  its  user  a  large  surplus  over  the  cost  of  operation  will, 
of  course,  command  a  high  price ;  but  it  is  the  surplus,  which  is 
rent,  that  causes  the  high  price,  and  not  the  price  that  causes 
the  surplus.  The  surplus  is  caused  by  its  good  location,  its  high 
fertility,  or  some  other  physical  or  social  advantage.  The 


524  PRINCIPLES  OF  NATIONAL  ECONOMY 

price  of  land  is  the  capitalized  value  of  its  rent  or  surplus. 
If  the  surplus  or  rent  is  once  determined  and  the  current  rate 
of  interest  known,  the  price  is  easily  reckoned  by  finding  what 
sum,  at  the  current  rate  of  interest,  will  yield  the  amount  of 
the  rent.  Thus,  if  the  rent  of  a  given  piece  of  land  is  found  to 
be,  one  year  with  another,  ten  dollars  an  acre,  and  the  current 
rate  of  interest  on  safe  investments  to  be  5  per  cent,  the  price 
will  be  two  hundred  dollars  an  acre.  Suppose,  now,  that  the 
conditions  change  so  as  to  reduce  the  surplus  below  ten  dollars : 
the  price  must  necessarily  fall.  That  is  to  say,  if  the  price  of 
the  products  of  the  land  should  fall  or  the  cost,  of  operation 
or  the  rate  of  interest  should  rise,  any  or  all  of  these  would 
of  mathematical  necessity  reduce  the  surplus.  The  process 
of  capitalization  would  then,  of  mathematical  necessity,  reduce 
the  selling  price  of  the  land.  On  the  other  hand,  a  rise  in  the 
price  of  products  or  a  fall  in  the  cost  of  operation  or  in  the 
rate  of  interest  would,  for  similar  reasons,  increase  the  price 
of  the  land. 

Another  popular  fallacy  is  that  a  rise  in  the  price  of  land  is 
the  cause  of  a  rise  in  farm  products,  the  argument  being  that 
when  the  price  of  land  goes  up,  the  farmer  must  get  a  higher 
price  in  order  to  recoup  himself  for  the  use  of  his  more  valuable 
land.  This  is  like  saying  that  the  reason  a  tree  is  so  tall  is  that 
its  shadow  is  so  long.  The  price  of  land  is  only  a  capitalization 
of  the  surplus  which  can  be  made  by  using  land.  When  that 
surplus  increases,  the  price  must  rise,  as  shown  in  the  last 
paragraph.  When  the  price  of  farm  products  rises,  unless 
the  cost  of  operation  rises  correspondingly,  there  is  naturally 
a  larger  surplus,  and  this  large  surplus  naturally  makes  land  a 
more  desirable  form  of  property  to  own ;  consequently  its 
present  owners  are  less  eager  to  sell  and  prospective  owners 
are  more  eager  to  buy.  This  will  necessarily  send  the  price 
of  land  up.  In  other  words,  the  rising  of  land  prices  follows 
as  a  result,  and  does  not  precede  as  a  cause,  the  rising  price  of 
products. 


THE  RENT  OF  LAND  525 

It  is  frequently  asserted,  on  the  basis  of  this  reasoning, 
that  even  rent  is  not  a  factor  in  determining  price.  In  dis- 
cussions of  this  topic  two  distinct  questions  have  been  stated, 
and  the  disputants  have  not  always  had  the  same  question  in 
mind.  One  question  is,  Would  prices  be  any  lower  if  landlords 
would  remit  rent  ?  The  rather  obvious  answer  is  No,  but  rent 
is  not  annihilated  when  landowners  remit  it.  The  rent  still 
exists,  but  the  tenants  get  it  (or  someone  else) ;  and  there  is 
no  reason  why  the  prices  should  be  lower  when  one  set  of 
men  gets  rent  than  they  would  be  if  the  rent  went  to  another  set 
of  men.  If  the  owner  of  a  farm  were  to  make  a  gift  of  it  to  his 
tenant,  it  is  not  probable  that  the  tenant  would  sell  his  prod- 
ucts any  cheaper ;  and  if  all  owners  made  gifts  to  all  tenants, 
there  is  no  reason  to  think  that  the  tenants  would  volunta- 
rily reduce  prices  or  that  the  market  conditions  would  be  so 
changed  as  to  compel  them  to  reduce  prices. 

Quite  a  different  question,  however,  is,  Would  prices  be  the 
same  if  conditions  were  such  that  land  yielded  no  rent?  If 
there  were  so  much  land  of  the  best  grade  as  to  enable  the 
community  to  supply  its  needs  without  making  use  of  second- 
grade  or  third-grade  land,  obviously  the  conditions  of  produc- 
tion would  be  more  favorable  than  when  it  is  compelled  to 
make  use  of  poorer  grades.  A  given  quantity  of  labor  and 
capital  when  applied  to  land  of  the  best  grade  will  produce 
more  than  when  it  is  divided  among  the  second,  third,  and 
fourth  grades.  Products  would  then  be  more  abundant  and  the 
price  of  farm  products  in  terms  of  other  goods  would  probably 
be  lower. 


CHAPTER  XXXVIII 

THE    DESIRABILITY   OF    CAPITAL   AND   ITS    RELATION 
TO   INTEREST 

What  is  interest  ?  One  of  the  most  difficult  and  elusive  of 
all  problems  in  economics  is  that  of  the  interest  of  capital.  In- 
terest may  be  denned  as  the  income  which  goes  to  the  owner  of 
capital,  whether  he  uses  it  in  his  own  business  or  lends  it  to 
somebody  else.  This  income  may  take  any  one  of  several 
forms.  The  most  common  and  clearly  understood  form  occurs 
where  a  definite  sum  of  value,  represented  usually  by  money,  is 
lent  by  the  owner  to  someone  else.  The  borrower,  in  return 
for  the  loan,  eventually  pays  back  not  only  the  principal  but  a 
stated  sum  or  percentage  of  the  principal  year  by  year.  The 
transfer  of  purchasing  power  from  the  lender  to  the  borrower, 
however,  does  not  necessarily  take  the  form  of  money.  It  may 
be  rather  a  claim  upon  some  credit  institution  for  money,  as 
when  the  lender  gives  the  borrower  a  check  on  a  bank.  The 
borrower  then  deposits  this  check  in  his  own  bank  and  pro- 
ceeds to  draw  his  own  checks  against  this  deposit.  In  a  case 
of  this  kind  no  tangible  money  is  personally  transferred,  and 
the  borrower  may  not  even  see  or  handle  any  money.  Never- 
theless, there  has  been  transferred  to  the  borrower  purchasing 
power  in  the  form  of  a  claim  upon  the  bank  for  money.  But 
the  purpose  of  the  borrower  was  not  ultimately  to  secure  money. 
Money  is  to  him  only  a  means  of  purchasing  something  which 
he  really  wants,  and  if  he  can  make  the  purchase  without 
actually  handling  the  money — by  handling  credit  instruments 
instead,  or  claims  upon  a  bank  for  money — his  purpose  is  an- 
swered just  as  well.  Aristotle  pointed  out  long  ago  that  money 

serves  merely  as  a  claim  upon  society  for  a  share  of  the  general 

.   "  526 


INTEREST  AND  DESIRABILITY  OF  CAPITAL       527 

fund  of  wealth  in  its  possession.  A  credit  instrument  is  only  a 
more  highly  evolved  claim  of  the  same  kind. 

In  the  second  place,  the  capitalist  may  transfer  to  the  bor- 
rower not  purchasing  power  but  the  material  goods  which 
the  borrower  desires  and  which  he  would  buy  if  he  were  given 
the  purchasing  power ;  that  is,  the  capitalist  may  transfer  to  the 
borrower  specific  pieces  of  capital,  such  as  buildings  and  ma- 
chinery, allowing  the  borrower  the  use  of  these  pieces  of  capital 
for  a  definite  period  of  time.  At  the  end  of  the  time  they  are 
of  course  to  be  returned  to  the  lender.  Meanwhile  a  definite 
sum  is  to  be  paid  at  stated  periods  for  their  use.  This  sum  is 
in  popular  language  frequently  called  rent  rather  than  interest. 
The  chief  reason  for  calling  it  rent  is  that  the  sum  which  is 
paid  in  the  form  of  money  for  the  use  of  a  group  of  material  ob- 
jects cannot  be  called  a  percentage  of  those  objects,  at  least  not 
until  they  are  evaluated  and  their  quantities  stated  in  terms 
of  value.  Suppose  that  the  agreement  was  to  pay  five  thou- 
sand dollars  a  year  for  a  certain  group  of  buildings  and  a 
mass  of  tools  and  equipment.  The  five  thousand  dollars  a  year 
is  not  a  percentage  of  the  group  of  buildings.  If,  however,  the 
buildings  are  appraised  and  their  value  is  stated  as  one  hundred 
thousand  dollars,  then  it  is  possible  to  reduce  the  annual  pay- 
ment for  their  use  to  a  percentage  basis.  It  might  then  be  said 
that  the  borrower  was  paying  5  per  cent  on  the  sum  borrowed. 
Unless  the  transaction  takes  this  form  it  is  more  convenient  to 
say  that  he  is  paying  five  thousand  dollars  rent  than  that  he 
is  paying  5  per  cent  interest.  The  chief  reason  for  calling  it 
interest  is  that  economists  have  formed  the  habit  (and  there 
are  reasons  for  this  habit)  of  speaking  of  rent  as  that  which  is 
paid  for  the  use  of  land,  and  of  interest  as  that  which  is  paid 
for  the  use  of  capital.  Since  the  buildings  and  the  equipment 
are  capital  rather  than  land,  that  which  is  paid  for  their  use 
would  have  to  be  called  interest,  unless  we  change  the  definition 
of  interest. 

Distinction  between  rent  and  interest.  There  seem  to  be  some 
very  important  reasons  for  distinguishing  between  rent  and  in- 


528  PRINCIPLES  OF  NATIONAL  ECONOMY 

terest  in  this  way.  Land  is  a  natural  resource;  it  is  not  the 
product  of  human  foresight  or  of  human  industry.  Buildings, 
tools,  equipment,  etc.  are  the  products  of  foresight,  enterprise, 
and  industry.  That  which  the  landowner  receives  as  rent  for 
his  land  he  receives  because  he  has  come  into  the  possession  of 
a  natural  agent  which  neither  he  nor  anyone  else  produced ; 
that  which  the  owner  receives  for  the  use  of  buildings,  tools, 
and  equipment  he  receives  for  something  which  he  either  pro- 
duced or  paid  someone  else  for  producing.  There  seems,  there- 
fore, to  be  a  wider  difference  between  that  which  is  paid  for  the 
use  of  buildings,  tools,  and  equipment  and  that  which  is  paid 
for  the  use  of  land  than  there  is  between  that  which  is  paid 
for  borrowed  money  and  that  which  is  paid  for  buildings,  tools, 
and  equipment.  In  this  discussion,  therefore,  we  shall  adhere 
to  the  distinction  between  rent  and  interest  which  nearly  all 
standard  books  on  economics  have  followed. 

Distinction,  between  interest  and  profits.  The  income  of  the 
capitalist  may  be  secured  from  the  use  of  capital  in  his  own 
business.  This,  however,  is  sometimes  difficult  to  distinguish 
from  profits.  Economists  generally  distinguish  between  in- 
terest and  profits  in  this  way :  the  business  man  who  has  his 
own  capital  invested  in  his  business  is  allowed  the  current  rate 
of  interest  on  that  investment ;  if  he  labors  or  puts  in  his  time 
supervising  the  business,  he  is  also  allowed  a  salary  or  wages 
of  superintendence ;  if  he  has  anything  left  over  after  allowing 
himself  interest  and  wages,  this  surplus  is  called  profit  or  profits. 
If  he  has  not  been  particularly  successful  the  profits  may  be 
negative;  in  other  words,  he  may  incur  a  loss.  That  means 
that  his  total  income  may  not  be  as  great  as  it  would  have  been 
if  he  had  gone  out  of  business,  lent  his  capital  at  interest,  and 
hired  himself  out  at  a  salary  as  a  superintendent. 

Interest,  therefore,  as  it  is  generally  defined,  includes,  first, 
that  which  the  owner  receives  for  the  use  of  a  fund  of  purchas- 
ing power  which  he  transfers  to  a  borrower ;  second,  that  which 
he  receives  for  the  use  of  a  mass  of  material  goods — buildings, 
tools,  equipment,  etc. — which  he  permits  the  borrower  to  use 


INTEREST  AND  DESIRABILITY  OF  CAPITAL       529 

for  a  stated  period;  and,  third,  that  which  he  receives  in 
return  for  the  capital  which  he  owns  and  which  he  uses  or 
has  invested  in  his  own  business.  Care  must  be  taken,  in  con- 
sidering these  various  forms  of  interest,  not  to  include  too 
much.  That  which  the  lender  of  a  fund  of  purchasing  power 
receives  in  excess  of  the  amount  necessary  to  preserve  the  fund 
intact  is  interest,  and  that  alone.  If  any  insurance  is  involved, 
this  must  be  deducted  from  the  total  amount  received.  Some 
very  hazardous  investments  appear  to  pay  very  high  rates  of 
interest.  This  may  be  called  gross  interest,  only  a  part  of  it 
being  net  interest,  the  remainder  being  payments  for  risk  and 
akin  to  profits  rather  than  interest.  Again,  when  equipment 
itself  is  lent,  rather  than  a  fund  of  purchasing  power,  allow- 
ance must  be  made  for  deterioration.  Unless  the  capitalist 
maintains  the  quantity  of  his  capital  intact  and  receives  a  sur- 
plus in  addition  to  this  he  has  not  received  interest.  It  might 
easily  happen  that  a  part  of  the  five  thousand  dollars  received 
for  the  buildings,  tools,  and  equipment  in  the  above  illustration 
was  necessary  to  keep  the  buildings  in  repair  and  to  recoup 
the  owner  for  the  necessary  deterioration.  In  short,  interest 
is  the  amount  which  the  owner  of  capital  receives  over  and 
above  the  sum  necessary  to  maintain  the  original  quantity  of 
his  capital. 

Why  is  interest  paid  ?  The  problem  of  interest  thus  defined 
divides  itself  into  two  parts  :  first,  why  is  interest  paid  ?  second, 
what  determines  the  rate  of  interest?  One  answer  to  the  first 
question  is  that  capital  is  productive.  This  could  apply  only  to 
what  we  have  defined  as  productive  as  opposed  to  acquisitive 
capital.  That  any  kind  of  capital  is  productive  has  sometimes 
been  called  in  question.  Something  depends  upon  the  meaning 
of  the  word  "productive."  No  one  has  challenged  the  proposi- 
tion that  tools  are  useful.  Those  who  assert  that  capital  is 
productive  mean  absolutely  nothing  more  than  this.  Those  who 
deny  the  productivity  of  capital  invariably  have  some  other 
definition  of  the  word  " productive"  in  mind,  and  there  is  not 
much  to  be  gained  by  quibbling  over  the  use  of  words. 


530  PRINCIPLES  OF  NATIONAL  ECONOMY 

If  tools  are  useful  it  is  pertinent  to  ask  for  what  they  are 
useful.  They  are  useful  for  production,  not  for  consumption. 
With  an  adequate  equipment  of  tools  one  can  produce  more 
than  with  an  inadequate  equipment.  The  formula  uMore  and 
better  tools,  more  production ;  fewer  tools  or  poorer  tools,  less 
production"  supplies  the  farmer  and  the  business  man  with  as 
good  a  theory  of  economic  causation  as  any  logician  has  ever 
been  able  to  invent.  If  I  am  a  farmer  and  perceive  that  with 
an  additional  horse  I  can  grow  a  larger  crop  than  if  I  did  not 
have  that  additional  horse,  I  am  not  likely  to  puzzle  my  head 
very  much  over  abstruse  questions  of  economic  causation. 
The  fact  that  a  larger  crop  will  result  from  my  using  another 
horse  is  a  sufficient  reason  why  I  should  try  to  come  into 
possession  of  that  horse. 

Marginal  productivity  of  capital.  It  is  true,  as  has  been 
pointed  out  and  argued  ad  nauseam,  that  if  I  did  not  have  any 
plows  or  tools  to  use  with  the  horse  he  would  be  of  no  use,  or 
that  if  I  did  not  have  any  labor  to  direct  him  he  would  not  pro- 
duce anything.  This  line  of  argument,  instead  of  proving  that 
the  horse  is  not  productive,  merely  proves  that  other  forms  of 
capital,  as  well  as  labor,  are  also  productive.  In  any  given  situ- 
ation, with  any  given  type  of  equipment,  find  out  how  much  you 
can  produce  without  any  particular  unit, — say  the  horse  in  ques- 
tion,— and  then  how  much  you  can  produce  with  it,  and  you 
have  a  measure  of  the  productivity  of  that  unit  in  that  situation. 
At  any  rate,  it  is  a  fair  test  as  to  how  much  that  unit  would  be 
worth  when  added  to  the  rest  of  the  equipment.  If  there  is 
another  farmer  whose  equipment  calls  for  an  extra  horse,  and 
if  an  extra  horse  will  add  more  to  the  product  on  his  farm  than 
on  mine,  the  other  farmer  will  bid  against  me  for  the  horse,  and 
under  the  circumstances  can  afford  to  pay  more  for  it  than  I. 
If  he  hasn't  the  money  with  which  to  purchase  it  he  can 
afford  to  pay  a  little  more  for  the  use  of  the  money  than  I  can 
afford  to  pay.  Apply  this  test  to  each  and  every  kind  of  capital 
required,  not  only  on  farms  but  in  shops  and  factories,  railroads, 
stores,  etc.,  and  we  get  an  idea  of  the  test  of  the  usefulness,  or 


INTEREST  AND  DESIRABILITY  OF  CAPITAL      531 

productivity,  of  capital.  It  might  very  well  be,  however,  that 
on  another  farm,  where  there  was  a  surplus  of  horses,  the  farmer 
in  charge  would  find  that  one  more  horse  would  add  little  or 
nothing  to  his  crop.  Having  a  surplus  of  horses,  what  he  would 
need  more  than  an  extra  horse  would  be  some*  extra  plows  and 
harrows,  or  plows  and  harrows  of  a  larger  size,  to  balance  his 
equipment.  If  he  understands  the  situation  he  will  see  that 
it  is  to  his  advantage  to  sell  some  of  his  horses  or  else  to  buy 
other  equipment.  This  balancing  of  the  equipment  of  indus- 
tries goes  on  all  through  society  and  is  one  of  the  fundamental 
problems  of  business  management.1 

Here  we  must  repeat  a  caution  which  was  given  in  the  dis- 
cussion of  value.  We  are  not  to  discuss  the  productiveness  of 
labor  in  general  or  of  capital  in  general,  any  more  than  we  are 
to  discuss,  under  the  problem  of  value,  the  utility  of  bread  in 
general,  meat  in  general,  or  water  in  general.  We  are  always 
concerned  with  definite  units  which  may  be  added  to  or  sub- 
tracted from  the  existing  supply.  Therefore  we  are  not  con- 
cerned with  the  productiveness  of  horses  in  general,  cows  in 
general,  or  even  capital  in  general,  but  with  the  need  for 
definite  units  of  capital,  such  as  one  horse  more  or  less,  one  cow 
more  or  less  on  a  given  farm,  one  boiler  more  or  less  in  a 
real  factory,  and  so  on  through  the  whole  range  of  industry. 
Wherever  any  producer  finds  that  he  could  use  more  capital  of 
any  form  advantageously,  he  has  a  perfectly  good  reason  for 
trying  to  get  an  additional  unit  of  that  particular  kind  of 
capital.  Whether  we  call  it  the  productivity  of  the  unit  of 
capital,  or  merely  its  usefulness,  does  not  matter. 

The  opposite  method  of  reasoning  is  involved  in  the  state- 
ment that  if  there  were  no  labor,  capital  could  not  produce 
anything.  This  is  dealing  with  labor  in  general  and  capital  in 
general.  It  is  likewise  true,  of  course,  that  if  there  were  not 
any  capital,  labor  would  not  be  able  to  produce  very  much 
during  the  next  month  or  the  next  year, — not,  in  fact,  until  it 
had  equipped  itself  with  a  new  supply  of  tools.  It  might  very 

i  Compare,  also,  Chapters  XVII  and  XXXIII. 


532  PRINCIPLES  OF  NATIONAL  ECONOMY 

well  happen  that  in  any  definite  community,  like  the  over- 
crowded section  of  a  great  city,  there  would  be  more  unskilled 
labor  than  could  possibly  be  used  at  that  particular  place.  The 
formula  "More  of  this  particular  kind  of  labor,  more  product" 
would  not  apply.  When  we  speak,  therefore,  of  the  produc- 
tivity of  capital,  we  do  not  mean  that  capital  is  productive 
under  all  possible  circumstances,  regardless  of  the  surround- 
ings. Neither  is  labor  productive  in  that  sense ;  it  has  to  be 
located  where  there  is  at  least  land  available,  and  in  order 
that  ft  may  be  very  productive  it  must  have  an  adequate  supply 
of  tools.  In  short,  nothing  is  productive  when  it  stands  alone, 
unrelated  to  many  other  things  in  the  surrounding  universe. 
Labor,  of  course,  is  a  more  fundamental  and  primary  agent 
of  production  than  capital,  since  capital  is  itself  the  result  of 
labor,  thrift,  and  enterprise.  But  we  are  not,  in  a  practical 
work  on  economics,  dealing  with  an  absolutely  primitive 
economic  situation ;  we  are  dealing  rather  with  the  conditions 
which  we  find  all  around  us  and  with  the  specific  needs  of 
specific  industries  and  specific  communities. 

What  does  capital  include  ?  As  capital  was  defined  in  the 
chapter  devoted  to  that  subject,  it  includes  something  more 
than  producers'  goods.  It  includes  consumers'  goods  which 
are  lent,  rented,  or  hired  in  order  to  secure  income  for  their 
owner.  In  these  cases  the  income  of  the  capitalist  is  not 
due  to  the  productivity  of  the  consumers'  goods  thus  lent; 
it  is  due  rather  to  their  usefulness  in  consumption.  He  who 
builds  a  dwelling  house,  or  hires  someone  else  to  build  it,  and 
then  rents  it  to  an  occupant  is  virtually  selling  the  flow  of 
utilities  which  the  house  furnishes  to  the  occupant  during  a 
definite  period  of  time.  These  utilities  are  in  the  form  of  com- 
fort, convenience,  luxury,  and  even  style  in  some  cases;  but 
the  problem  of  interest  is  much  the  same,  in  the  last  analysis, 
whether  the  capital  be  productive  or  acquisitive. 

Capital  itself,  not  its  value,  is  productive.  Those  who  deny  the 
productivity  of  capital  generally  have  a  special  definition  of 
capital.  Instead  of  thinking  of  productive  agents  they  are  usu- 


INTEREST  AND  DESIRABILITY  OF  CAPITAL       533 

ally  thinking  of  a  sum  of  value.  They  do  not  necessarily  mean 
money,  but  a  fund  of  value  which  is  embodied  in  capital  goods. 
Of  course  the  value  of  capital  goods  does  not  produce  any- 
thing. The  value  of  the  horse  does  not  cause  him  to  do  good 
farm  work ;  it  is  the  fact  that  he  does  good  farm  work  which 
causes  him  to  have  value.  If,  instead  of  thinking  of  the  farmer's 
capital  as  horses,  cows,  and  other  equipment,  we  think  merely 
of  the  value  which  is  embodied  in  them,  we  may  easily  reach 
the  conclusion  that  capital  is  not  productive ;  but  if,  instead  of 
thinking  of  the  value  which  is  embodied  in  them,  we  think  of 
the  objects  themselves,  we  can  hardly  avoid  the  conclusion  that 
they  are  the  agents  by  which  production  is  increased. 

In  order  to  bring  the  law  of  interest  under  the  general  law 
of  value,  let  us  recall  the  fact  that  things  have  value  only  when 
they  are  wanted  by  someone.  This  is  as  true  of  capital  as  of 
anything  else.  If  we  confine  our  attention  to  that  portion  of  cap- 
ital which  consists  of  producers'  goods,  without  considering  the 
subject  of  consumers'  goods  which  are  used  by  their  owners 
for  the  getting  of  an  income,  it  is  safe  to  say  that  the  use  of 
capital  is  desired  only  for  the  sake  of  what  it  will  add  to  the 
productive  power  of  the  user.  He  does  not  want  it  for  its  own 
sake.  If  it  added  nothing  to  his  productive  power  he  would 
not  want  it  and  would  not  be  willing  to  pay  a  price  for  the  privi- 
lege of  using  it.  Even  the  owner  desires  to  own  capital  not 
because  capital  is  itself  capable  of  gratifying  a  desire  directly 
but  because  it  is  capable  of  adding  to  his  income.  If  it  added 
nothing  to  his  income  (that  is,  if,  as  the  result  of  using  it  in  his 
business,  he  was  merely  able  to  get  back  the  original  cost,  that 
is,  the  principal)  he  would  have  no  motive  for  owning  it  or 
using  it.  The  more  it  will  add  to  the  productivity  of  his  busi- 
ness, the  more  he  will  desire  the  use  of  it. 

Why  capital  is  wanted.  The  productivity  of  capital,  or  the 
advantage  of  having  the  use  of  it,  is  subject  to  the  principle  of 
marginal  productivity,  as  is  the  productivity  of  labor  and  land. 
If  you  increase  the  number  of  instruments  of  a  given  kind  in 
any  industrial  establishment,  leaving  everything  else  in  the 


534  PRINCIPLES  OF  NATIONAL  ECONOMY 


establishment  the  same  as  before,  you  may  within  limits  in- 
crease the  total  product  of  the  establishment  somewhat,  but 
you  will  not  increase  the  product  in  proportion  to  the  increase 
in  the  number  of  instruments  in  question.  If  you  increase  all 
the  instruments  in  a  given  industrial  establishment  without 
increasing  the  labor  at  the  same  time,  each  instrument  will  be 
used  a  little  less  intensively,  or  it  will  be  idle  a  greater  number 
of  minutes  per  day,  simply  because  of  the  scarcity  of  labor.  On 
the  other  hand,  of  course,  if  you  diminish  the  number  of  in- 
struments or  the  total  equipment,  leaving  the  amount  of  labor 
the  same,  each  instrument,  or  each  unit  of  the  equipment,  will 
have  to  be  used  more  intensively. 

The  productivity  of  capital  decreases,  other  things  being  equal, 
as  its  quantity  increases.  Take  a  farm,  for  example.  With  a 
given  labor  force,  the  greater  the  number  and  variety  of  tools 
and  implements,  the  less  intensively  each  one  is  likely  to  be 
used  ;  and  the  smaller  the  number,  the  more  intensively  each  is 
likely  to  be  used.  There  are  many  farms  on  which  it  is  found 
that  there  are  such  a  number  and  variety  of  tools  and  imple- 
ments that  the  farmer  is  really  not  getting  any  interest  on  a 
large  part  of  his  investment.  Some  expensive  tools  are  idle  so 
much  of  the  year  that  they  do  not  pay  for  themselves ;  that  is, 
the  farmer  never  gets  back  the  original  price  which  he  paid,  to 
say  nothing  about  getting  interest  on  that  price.  On  the  other 
hand,  there  are  other  farms  so  poorly  equipped  that  every  tool 
in  the  farmer's  equipment  is  used  very  intensively,  and  it  would 
be  money  in  his  pocket  to  invest  in  additional  equipment.  For 
every  dollar  which  he  put  into  more  and  better  tools  he  would 
get  back  not  only  the  original  cost  price  but  something  in 
addition  which  could  be  called  interest  on  the  investment. 

That  which  is  found  to  happen  on  farms  is  also  found  to 
happen  in  larger  industrial  establishments, — factories,  railroads, 
etc.  That  which  is  true  of  an  individual  farm,  shop,  or  other 
business  establishment  is  also  true  of  the  community  as  a  whole. 
If,  for  example,  there  are  very  few  plows  in  a  given  community 
where  there  is  an  abundance  of  land,  many  laborers,  and  much 


INTEREST  AND  DESIRABILITY  OF  CAPITAL       535 


other  capital  besides  plows,  each  and  every  plow  would  be  a 
matter  of  considerable  importance ;  it  would  be  in  general  de- 
mand and  would  be  used  a  great  number  of  days  in  the  year. 
Under  these  conditions  you  could  say  of  that  community, 
"One  more  plow,  considerably  more  product;  one  less  plow, 
considerably  less  product";  in  short,  the  marginal  productivity, 
in  that  particular  community,  of  that  form  of  capital  called 
plows  would  be  high.  If,  on  the  other  hand,  there  were  a  great 
number  and  variety  of  plows  in  the  community,  other  factors 
remaining  the  same, 
each  one  would  be  a 
matter  of  much  less 
importance;  each  one 
would  be  idle  a  greater 
number  of  days  in 
the  year.  Then  you 
could  say,  "One  more 

plow,    comparatively       3—  D     D> 

little  more  product; 


r 

Ft 

F 

-^ 

Bf 

B" 

in 


short, 


one  less  plow,  comparatively  little  less  product"; 
the  marginal  productivity  of  plows  would  be  low. 

Applying  the  same  method  of  reasoning  to  other  forms  of 
capital  or  to  all  forms  of  capital,  we  reach  the  same  conclusions. 
An  abundance  of  all  forms  of  capital,  land  and  labor  remaining 
the  same,  would  give  a  low  marginal  productivity  to  capital ; 
whereas  a  scarcity  of  all  forms  of  capital,  land  and  labor  re- 
maining the  same,  would  give  a  high  productivity  to  all  forms 
of  capital.  This  would  show  itself  also  in  the  case  of  liquid, 
or  uninvested,  capital.  Where  all  forms  of  capital  are  scarce, 
one  hundred  dollars  invested  in  tools  would  add  considerably  to 
the  productivity  of  the  community;  but  where  all  forms  of 
capital  are  very  abundant,  then  one  hundred  dollars  invested 
in  additional  tools  would  be  of  comparatively  little  value. 

The  preceding  diagram  will  serve  as  an  illustration  of  this 
law  and  also  as  a  means  of  introducing  the  next  question  to 
be  considered  in  the  general  problem  of  interest. 


536  PRINCIPLES  OF  NATIONAL  ECONOMY 

Let  the  amount  of  capital  in  the  industrial  community  be  meas- 
ured along  the  horizontal  line  AC ;  let  the  productivity  of  capital  be 
measured  along  the  perpendicular  line  AE ;  and  let  the  descending 
line  EC  represent  the  rate  of  decrease  in  the  marginal  productivity 
of  capital.  If  the  amount  of  capital  were  measured  by  AD,  the 
marginal  productivity  would  be  measured  by  the  line  BD,  or  AF.  If 
the  amount  of  capital  were  measured  by  AD',  the  marginal  produc- 
tivity would,  other  things  remaining  equal,  be  measured  by  the  line 
B'D',  or  AF' ;  and  when  the  amount  of  capital  equaled  AD",  mar- 
ginal productivity  would  equal  B"D",  or  AF".  From  this  it  foHows 
inevitably  that  if  capital  went  on  increasing  to  AC,  the  marginal  pro- 
ductivity of  capital  would  be  destroyed  altogether.  That  is  to  say, 
the  supply  of  capital  would  have  reached  that  limit  where  no  more 
could  be  used  to  advantage,  and  some  could  be  spared  without  loss.1 

JT.  N.  Carver,  The  Distribution  of  Wealth,  pp.  223-224.  The  Macmillan 
Company,  New  York. 


CHAPTER  XXXIX 

THE  COST  OF  CAPITAL  AND  ITS  RELATION  TO  INTEREST 

Why  capital  is  scarce.  Seeing  that  the  marginal  productivity 
of  capital,  or  the  advantageous  use  of  its  marginal  increment, 
diminishes  as  the  supply  of  capital  increases  relatively  to  other 
factors,  it  is  quite  important  that  we  should  be  able  to  account 
for  the  supply  of  capital  as  well  as  for  its  demand.  Its  demand, 
as  has  already  been  suggested,  is  based  upon  its  desirability  in 
production  or  in  consumption ;  that  is,  upon  its  productivity  or 
the  opportunity  for  its  advantageous  use.  Unless,  therefore,  the 
supply  were  in  some  way  limited,  productive  capital  might  be- 
come so  abundant  as  to  leave  it  with  no  marginal  productivity 
at  all.  We  found,  when  we  were  discussing  the  value  of  com- 
modities, that  the  cost  of  producing  them  operated  as  a  check 
on  production  and  kept  the  supply  within  such  limits  as  would 
give  them  a  price  approximately  sufficient  to  pay  the  cost  of 
production.  Some  factor  must  be  found  which  limits  the  supply 
of  capital  as  cost  of  production  limits  the  supply  of  an  ordinary 
commodity. 

The  irksomeness  of  waiting.  There  are  two  factors  which  are 
obviously  at  work :  one  is  the  mere  cost  of  producing  the  capi- 
tal goods ;  the  other  is  the  cost  of  waiting,  or  the  disinclination 
which  many  individuals  feel  toward  waiting.  The  cost  of  pro- 
ducing tools  needs  very  little  discussion.  Unless  the  farmer's 
plow  will  return  him,  before  it  is  worn  out,  enough  to  replace 
the  price  which  he  originally  paid  for  it,  he  will  of  course  have 
no  motive  for  paying  that  price.  If  plows  should  become  so 
numerous  on  a  given  farm  that  the  farmer  felt  that  he  would 
probably  never  get  back  enough  from  a  new  plow,  added  to 
those  already  in  use;  to  repay  the  price  of  that  plow,  it  would 

537 


538  PRINCIPLES  OF  NATIONAL  ECONOMY 

be  foolish  for  him  to  buy  it.  If  every  farmer  behaves  in  this 
way,  certainly  no  more  plows  will  be  bought  than  can  be  used 
with  that  degree  of  advantage.  If  he  has  to  pay  fifty  dollars 
for  a  new  riding  plow;  and  if  he  figures  that  in  the  course  of  its 
lifetime  it  will  add  only  fifty  dollars  to  his  product  over  and 
above  what  he  could  produce  with  his  existing  equipment,  then 
he  would  of  course  gain  nothing  from  its  purchase ;  he  would 
merely  get  back  the  original  purchase  price.  If  the  average 
farmer  had  no  disinclination  toward  waiting  it  is  probable  that 
farmers  would  buy  so  many  plows  as  to  reduce  the  marginal 
productivity  of  plows  to  the  level  of  the  cost;  that  is,  to  the 
level  of  the  purchase  price. 

But  suppose  that  the  plow  which  cost  fifty  dollars  will  return 
the  farmer  only  five  dollars  a  year  and  will  last  ten  years ;  it  then 
just  replaces  its  original  cost;  the  farmer  will  have  got  back 
at  the  end  of  ten  years  the  money  which  he  put  into  it,  and  no 
more.  Meanwhile  he  has  had  to  wait  ten  years.  If  he  does  not 
mind  waiting, — if  waiting  is  not  in  the  slightest  degree  irk- 
some to  him, — he  will  probably  be  willing  to  buy  a  plow  under 
such  circumstances,  though  there  will  be  neither  loss  nor  gain. 
If,  however,  he  does  not  like  to  wait, — if  he  prefers  present 
enjoyment  to  future  enjoyment, — then  he  will  hold  on  to  his 
fifty  dollars  in  the  first  place  rather  than  spend  it  for  something 
which  will  return  fifty  dollars  in  ten  years'  time.  Under  these 
circumstances  he  will  certainly  not  buy  the  plow  unless  he  has 
so  few  plows  as  to  give  a  higher  marginal  productivity  than 
that  which  we  have  been  discussing.  If  he  has  so  few  plows 
that  the  possession  of  an  additional  plow  will  in  the  course  of 
ten  years  add  one  hundred  dollars  to  his  income,  he  will  add 
fifty  dollars  to  his  wealth  during  the  ten-year  period, — that 
is  to  say,  fifty  dollars  will  go  to  replace  the  purchase  price 
of  the  plow ;  the  other  fifty  dollars  is  surplus.  This  and  this 
alone  is  interest,  and  a  rather  high  rate  of  interest ;  namely, 
10  per  cent  per  annum.  But  if  every  farmer  is  likewise  disinclined 
to  wait,  the  market  for  plows  will  be  limited.  Only  as  many 
will  be  purchased  as  will  yield  a  return  large  enough  to  more 


INTEREST  AND  COST  OF  CAPITAL 


539 


than  pay  the  purchase  price.  In  other  words,  farmers  in  general 
will  get  some  interest  on  that  which  they  invest  in  plows. 

This  may  be  illustrated  by  the  following  diagram. 

Let  us  suppose,  as  in  the  former  diagram,  that  the  number  of 
implements  of  a  certain  kind,  say  plows,  is  measured  along  the  line 
AC,  and  their  marginal  productivity  along  the  line  AE.  In  this  case, 
however,  we  mean  their  total  marginal  product  during  their  average 
lifetime,  or  that  amount  which  an  average  plow  will  add  to  the  prod- 
uct of  the  community  during  its  lifetime,  over  and  above  what  could 
be  produced  without  it. 
To  distinguish  this  from 
the  marginal  product 
per  year  we  shall  call  it 
the  total  earnings  of  a 
plow.  Letting  the  de- 
scending line  represent 
the  decline  in  the  total 
earnings  of  each  plow  as 
the  number  of  plows  in- 
creases, the  line  DB,  or 

AF,  would  represent  the  total  earnings  of  each  plow  when  their  number 
was  represented  by  the  line  AD.  When  their  number  is  AD'  the 
total  earnings  of  each  would  be  D'B',  or  AF';  and  when  the  number 
is  AD"  the  total  earnings  of  each  would  be  D"B",  or  AF".  Let  us 
further  suppose  that  the  cost  of  making  plows  is  represented  by  the 
perpendicular  distance  of  the  various  points  on  the  ascending  line 
GB'  above  the  base  line  AC.  If  this  cost  were  the  only  check  on  the 
production  of  plows  there  is  no  reason  why  they  should  not  increase 
to  the  point  D',  where  the  total  earnings  of  each  plow  would  just  pay 
the  cost  of  making  the  most  expensive  plow  of  the  total  supply. 
They  would  sell  at  the  uniform  price  of  D'B',  or  AF',  which  would  be 
their  normal  equilibrium  price.  The  total  earnings  of  a  plow  would 
then  just  cover  the  price  which  the  buyer  would  have  to  give  for  it.1 

Why  the  present  value  of  a  productive  agent  is  less  than  the 
future  value  of  all  its  products.   Now  as  a  matter  of  fact,  people 

XT.  N.   Carver,  The  Distribution  of  Wealth,  pp.   226-227.    The  Macmillan 
Company,  New  York. 


F' 
F 
G 

\  B' 

B" 



^^ 

"-"" 

D 


D'      D' 


540  PRINCIPLES  OF  NATIONAL  ECONOMY 

do  not  like  to  wait.  Waiting  is  to  some  quite  as  irksome  as 
working.  It  is  also  quite  as  necessary  to  efficient  production. 
Anything,  whether  it  be  working,  waiting,  or  risking,  which  is 
necessary  to  efficient  production,  and  which  at  the  same  time  is 
irksome,  must  be  paid  for.  The  fact  that  it  is  necessary  for 
production  furnishes  a  sufficient  motive  for  paying  for  it ;  the 
fact  that  it  is  irksome  makes  it  necessary  to  pay  for-  it,  because 
men  will  not  otherwise  perform  this  function.  In  order  that 
there  may  be  an  adequate  supply  of  tools,  which  is  necessary 
for  efficient  production,  there  must  be  waiting.  Labor  must  be 
performed  in  the  making  of  the  tools;  and  then  somebody  must 
wait  until  they  have  been  used  for  a  number  of  years  in  order 
to  get  back  from  their  use  the  equivalent  of  that  which  was 
originally  expended  in  making  them.  If  the  laborers  who  make 
the  tools  are  not  themselves  willing  to  wait,  they  may  sell  them 
to  someone  else,  who  then  undertakes  to  wait  for  their  products 
to  mature.  If  both  the  laborers  who  make  the  tools  and  the  one 
who  purchases  them  are  disinclined  to  wait,  their  market  price 
will  have  to  be  something  less  than  the  sum  of  their  future 
earnings.  The  laborers,  being  disinclined  to  wait,  will  be  will- 
ing to  sell  for  a  cash  price  somewhat  lower  than  the  total  sum  of 
future  earnings,  and  the  purchaser  will  not  be  willing  to  pay  a 
price  which  would  equal  the  sum  total  of  the  future  earnings. 
In  the  price-making  process,  therefore,  the  capital  goods  must 
necessarily  sell  for  less  than  the  sum  of  the  future  earnings. 
The  buyer  who  holds  them  during  their  lifetime  finds  himself  in 
possession  of  a  surplus,  which  is  his  compensation  for  waiting. 

Take  the  case  of  a  blacksmith  who,  by  his  own  labor,  makes  a 
plow  out  of  materials  which  cost  him  five  dollars.  Let  us  suppose 
that  he  can  in  a  fortnight  make  a  plow  which  will  earn  a  total  of 
thirty  dollars  during  its  lifetime  of  ten  years.  Deducting  the  cost  of 
materials,  this  leaves  him  twenty-five  as  the  net  earnings  of  his  fort- 
night's work ;  but  he  must  wait  for  his  wages,  receiving  them  in  in- 
stallments over  a  period  of  ten  years.  If  he  does  not  mind  waiting 
this  will  be  no  drawback,  and  he  would  just  as  lief  make  a  plow  as 
work  for  the  same  amount  in  cash  or  in  present  consumable  goods. 


INTEREST  AND  COST  OF  CAPITAL  541 

Or,  having  made  such  a  plow,  he  would  not  sell  it  for  less  than  thirty 
dollars,  the  total  amount  which  it  will  be  expected  to  earn  during 
its  lifetime. 

But  if  he  does  mind  waiting  and  would  much  prefer  to  receive  his 
wages  at  once,  he  would  not  make  plows  at  all  so  long  as  he  could 
earn  twenty-five  dollars  per  fortnight  in  present  consumable  goods. 
Or,  having  made  a  plow  which  will  earn  thirty  dollars  in  the  course 
of  its  lifetime,  he  would  be  willing  to  sell  it  for  less  than  that  amount, 
which,  counting  out  the  cost  of  the  raw  materials,  would  net  him  less 
than  twenty-five  dollars  for  his  work.  If  no  blacksmith  could  be 
found  willing  either  to  wait  ten  years  for  his  wages  or  to  accept  less 
than  twenty-five  dollars  for  the  amount  of  work  necessary  to  make  a 
plow,  no  plows  with  such  small  earning  capacity  would  be  made  un- 
less someone  else  could  be  found  who  did  not  mind  waiting  and  who 
would  therefore  be  willing  to  pay  thirty  dollars  for  a  plow  and  then 
wait  ten  years  to  get  his  money  back.  But  if  no  such  person  could 
be  found,  the  making  of  plows  would  stop  until  their  growing  scarcity 
raised  their  marginal  productivity  and  their  total  earnings  somewhat 
above  thirty  dollars.1 

Though  it  is  not  likely  that  anyone  would  be  willing  to  wait 
ten  years  to  get  his  money  back,  one  might  be  willing  to  wait  if 
he  could  get  back  not  only  the  original  sum  of  money  but  a 
surplus  besides.  The  farmer,  for  example,  might  be  willing  to 
pay  thirty  dollars  for  a  plow  which  would  in  the  course  of  ten 
years  earn  him  fifty  dollars.  The  twenty  dollars  surplus  would 
be  interest.  The  problem,  as  it  presents  itself  to  the  farmer 
who  is  contemplating  investing  money  in  a  plow,  is  very  much 
the  same  as  that  which  presents  itself  to  a  lender  who  is 
contemplating  lending  money  to  someone  else.  As  a  rule  he 
prefers  to  keep  his  money  rather  than  lend  it,  unless  he  can  get 
a  surplus  by  lending  it.  Every  form  of  investment  involves  the 
same  problem.  The  investor  is  compelled  to  give  up  something 
in  the  present  (that  is,  either  money  or  the  opportunity  to  spend 
money  for  present  goods)  in  order  that  he  may  have  the  means 
of  securing  the  money  or  goods  at  some  time  in  the  future.  The 

XT.  N.  Carver,  The  Distribution  of  Wealth,  pp.  229-230.  The  Macmillan 
Company,  New  York. 


542  PRINCIPLES  OF  NATIONAL  ECONOMY 

disinclination  which  is  generally  felt  toward  waiting  is  such 
that  men  will  not,  as  a  rule,  invest  and  wait  unless  there  is  a 
chance  to  get  a  surplus.  The  surplus  is  then  in  a  sense  the 
reward  for  waiting. 

It  is  not  to  be  assumed  that  there  is  anything  inherently  meri- 
torious in  waiting  merely  for  the  sake  of  waiting.  The  only 
merit  there  is  in  the  process  is  in  the  increased  production  which 
comes  through  the  use  of  effective  tools  and  equipment.  Since, 
furthermore,  one  cannot  provide  oneself  with  effective  tools 
and  equipment  without  waiting  or  inducing  somebody  else  to 
wait,  we  have  a  sufficient  reason  why  waiting  should  be  paid 
for  when  it  results  in  increased  production.  If  it  does  not  nor- 
mally result  in  increased  production,  there  is  no  reason  for 
waiting  and  therefore  no  reason  why  it  should  be  paid  for. 

Not  all  waiting  is  irksome.  While  it  is  true  that,  as  a  general 
rule,  men  are  disinclined  toward  waiting  (that  is,  they  prefer 
present  to  future  goods),  still  there  is  a  certain  amount  of 
waiting  which  takes  places  normally  without  any  great  amount 
of  sacrifice  and  which  therefore  does  not  need  to  be  paid  for. 
There  would  be  some  saving  even  if  no  interest  could  be  secured 
on  savings.  In  fact,  it  is  probable  that  a  considerable  amount 
of  saving  would  take  place  even  if  men  were  compelled  to  hire 
vaults  or  storage  places  in  which  to  keep  their  savings.  In  this 
case  savings  could  be  said  to  yield  negative  interest  rather  than 
positive  interest. 

In  so  far  as  it  is  true  that  men  estimate  present  consumption 
higher  than  future  consumption,  it  applies  only  to  the  consump- 
tion of  corresponding  or  similar  increments  of  income.  A  man 
with  a  large  income  may  be  said  to  derive  less  utility  from  the 
last  dollar  of  his  income  than  from  the  others ;  or,  to  put  it  in 
another  form,  he  can  lose  one  dollar  of  his  income  with  com- 
paratively little  feeling  of  loss  or  sacrifice  ;  but  if,  with  the  same 
general  scale  of  wants,  his  income  were  much  smaller,  then  the 
loss  of  a  dollar  would  be  more  keenly  felt.  If  his  income  is  very 
large,  he  may  find  it  difficult  to  spend  it  all  on  present  consump- 


INTEREST  AND  COST  OF  CAPITAL  543 

tion.  In  this  case  it  may  be  easier  to  save  it  than  not  to  save  it. 
To  invest  a  little  of  one's  large  income,  may,  therefore,  involve 
no  cost  or  sacrifice  whatsoever. 

On  the  other  hand,  anyone  who  is  gifted  with  a  moderate 
degree  of  foresight  will  look  ahead  and  consider  the  possibili- 
ties of  future  emergencies.  He  may  therefore  lay  up  for  a  rainy 
day,  for  sickness,  or  for  old  age,  even  though  there  is  no  possi- 
bility whatever  of  securing  interest  on  his  savings.  If  one  who 
has  a  large  present  income  foresees  the  possibility  that  at  some 
future  time  his  income  may  be  cut  off,  he  may  reason  somewhat 
as  follows:  "  I  can  spare  the  few  unimportant  luxuries  which  the 
last  hundred  dollars  of  my  income  will  buy,  without  any  appre- 
ciable sacrifice.  At  some  future  time  this  hundred  dollars  may 
supply  my  most  pressing  needs,  if  I  should  find  myself  some 
day  without  an  income.  Therefore  it  will  be  very  much  better 
if  I  save  this  hundred  dollars  and  lay  it  up  against  that  day 
than  if  I  consume  it  now."  Another  person,  with  a  smaller' 
income,  would  reason  in  the  same  way,  though  the  sum  which 
he  would  lay  by  would  be  smaller.  And  a  person  with  a  larger 
income  would  likewise  reason  in  the  same  way,  though  the  sum 
which  he  would  lay  by  would  be  larger.  Taking  the  whole  com- 
munity, especially  if  it  contains  a  great  many  well-to-do  people, 
a  considerable  mass  of  wealth  would  be  saved  for  this  reason 
alone.  This  kind  of  saving  may  be  said,  therefore,  to  involve 
no  cost;  and  yet  those  who  save  in  this  way  are  able  to  se- 
cure interest  on  their  savings,  along  with  those  who  save  at 
considerable  sacrifice. 

Some  capital  accumulated  without  expectation  of  interest.  If 
those  sums  which  are  saved  in  this  way  without  sacrifice  were 
sufficient  to  meet  the  demands  of  all  communities  for  capital, 
such  a  thing  as  interest  would  not  exist ;  that  is  to  say,  if  so 
much  were  saved  in  this  way,  and  there  were  so  few  opportuni- 
ties for  using  capital  as  to  reduce  the  marginal  productivity  of 
capital  to  the  minimum  point,  capital  would  practically  be  a 
drug  on  the  market.  If;  however,  the  opportunities  for  the 


544  PRINCIPLES  OF  NATIONAL  ECONOMY 

productive  use  of  capital  are  so  great  that  more  capital  is  de- 
manded than  can  be  saved  without  cost,  then,  in  order  to  induce 
further  saving,  a  surplus  must  be  paid  for  its  use. 

Interest  a  part  of  the  general  law  of  value  and  price.  The 
price  which  is  paid  for  the  use  of  capital  comes  under  the  same 
law  as  the  price  which  is  paid  for  anything  else.  In  the  chapter 
on  Scarcity  it  was  pointed  out  that  some  goods  are  produced, 
under  certain  circumstances,  practically  without  cost.  Trout, 
where  the  fishing  is  good,  are  caught  for  the  pleasure  of  the 
sport.  If  the  number  of  trout  that  can  be  caught  for  pleasure 
is  sufficient  to  satiate  the  desire  for  trout,  then  trout  commands 
no  price ;  if  this  quantity  is  not  sufficient  to  satiate  the  desire, 
and  consumers  are  demanding  more,  then  they  must  begin 
to  pay  a  price  to  induce  other  fishermen  to  undertake  the  work 
of  providing  an  adequate  supply.  The  law  here  is  the  same  as 
that  which  controls  capital.  Some  capital  will  be  accumulated 
without  cost.  There  is  probably  no  community  in  existence, 
however,  in  which  enough  capital  to  supply  all  demands  is 
provided  in  this  way.  It  is  therefore  necessary  for  all  who  need 
it  to  offer  a -price  in  order  to  induce  a  larger  volume  of  saving 
than  would  take  place  if  no  interest  were  paid ;  that  is,  no 
price  for  the  use  of  capital. 

The  cost  of  saving  is,  like  other  forms  of  cost,  ultimately  a 
matter  of  psychology.  Among  people  who  are  gifted  with  a 
large  degree  of  forethought,  saving  is  less  irksome  than  it  is 
among  people  who  live  mainly  in  the  present.  Among  people  of 
the  latter  class  very  little  saving  will  take  place  unless  there  is 
a  distinct  reward  for  it.  Among  people  of  the  former  class  a 
great  deal  of  saving  would  take  place  even  if  there  were  no 
reward.  A  community  with  little  forethought  is  therefore 
always  one  in  which  interest  rates  are  high,  because  there  are 
small  accumulations  of  capital  and,  the  supply  being  small, 
there  is  great  need  for  more.  It  is  the  need  for  more  of  a 
thing  which  induces  people  to  pay  a  price  for  it. 

The  functional  theory  of  interest.  This  theory  of  interest  may 
be  called  a  functional  theory  of  interest,  to  correspond  with  the 


INTEREST  AND  COST  OF  CAPITAL 


545 


functional  theory  of  value  and  the  functional  theory  of  wages, 
which  have  already  been  outlined.  The  function  of  a  high  price, 
as  has  been  pointed  out,  is  to  call  forth  a  larger  supply ;  the 
function  of  high  wages  is  to  stimulate  a  larger  supply  of  the 
labor  which  receives  high  wages  ;  and  the  function  of  a  high  rate 
of  interest  is  to  call  forth  a  larger  supply  of  capital  for  which 
interest  is  paid.  A  community  that  needs  more  capital  can  get 
it  only  by  inducing  larger  savings.  These  larger  savings  may 


X\ 

B 

/ 
INTEREST              /' 

B' 

s' 

"^ 

,..•£-  ~~ 

I 

^ 

G 
H 

"._,.-"-'''     J 

COST  OF  PRODUCTION 

^\ 

i 

"*-.<^ 

K 


1> 


D' 


be  secured  either  by  compulsion  (that  is,  by  taking  a  part  of 
the  social  income  by  authority  and  setting  it  aside)  or  by 
attraction  (that  is,  by  offering  a  reward  for  saving).  There  is 
no  other  possible  way  that  has  ever  been  suggested,  even  on 
paper,  for  accomplishing  this  necessary  result. 

Let  us  assume  that  the  amount  of  a  certain  kind  of  capital  is  meas- 
ured along  the  line  AC,  and  its  marginal  productivity  along  the  line 
AE,  the  descending  curve  EC  representing  the  decline  in  the  marginal 
productivity  as  the  supply  increases.  If  there  were  nothing  to  check 
its  production  but  the  cost  of  producing  it,  the  supply  would  nor- 
mally increase  to  the  point  D',  where  the  marginal  product  would 
just  cover  the  marginal  cost,  and  there  would  be  no  interest.  This 
point  is  located  by  the  intersection  of  the  cost  curve  GB'  with  the 
productivity  curve  EC.  But  in  addition  to  the  cost  of  production 
there  is  the  disadvantage  or  sacrifice  of  waiting.  The  effect  of  this 


546  PRINCIPLES  OF  NATIONAL  ECONOMY 

is  illustrated  by  the  rising  curve  HB.  This  curve  represents,  by  its 
distance  above  or  below  the  cost  curve  GB,  the  positive  or  negative 
sacrifice  of  saving  the  different  parts  of  the  supply  of  capital.  Where 
this  curve  is  below  the  cost  curve  it  means  that  there  is  an  advantage 
rather  than  a  disadvantage  connected  with  the  exchange  of  present 
for  future  goods  which  saving  implies ;  where  this  curve  coincides 
with  the  cost  curve  there  is  neither  advantage  nor  disadvantage  con- 
nected with  saving ;  but  when  it  rises  above  the  cost  curve  there  is 
a  disadvantage  connected  with  saving  which  becomes  a  check  upon 
the  production  of  capital  in  addition  to  that  effected  by  the  cost  of 
producing  it. 

If  the  production  of  capital  should  stop  at  the  point  K,  where,  as 
shown  by  the  intersection  of  the  abstinence  curve  HB  with  the  cost 
curve  GB',  there  is  neither  advantage  nor  disadvantage  connected 
with  saving,  its  marginal  productivity  would  be  represented  by  the 
line  KL.  This  would  give  its  owner  an  advantage  far  in  excess  of  any 
disadvantage  connected  with  its  production,  and  this  would  stimulate 
its  further  production.  But  in  order  to  increase  its  production  it 
would  be  necessary  to  do  more  waiting  as  well  as  more  work.  From 
this  point  on,  further  waiting  begins  to  be  burdensome,  acting  as  a 
positive  check  upon  production.  The  normal  tendency  would  be  for 
capital  to  increase  up  to  the  point  D,  where  the  combined  disad- 
vantage of  working  and  waiting,  or  of  cost  of  production  and  absti- 
nence, would  be  just  compensated  by  the  marginal  productivity  of 
that  kind  of  capital.  At  this  point  the  marginal  productivity  would 
be  represented  by  the  line  DB,  the  marginal  cost  of  production  by 
the  line  DI,  and  the  marginal  abstinence  by  the  line  IB.  The  total 
present  value  of  that  kind  of  capital  would  then  be  represented  by 
the  parallelogram  A  DIP'.  The  total  product  of  the  present  supply  of 
capital  during  its  lifetime  would  be  represented  by  the  parallelogram 
A  DBF,  and  the  total  surplus,  or  interest,  by  the  parallelogram  F'IBF. 

THE  PURCHASER'S  DEMAND  FOR  AGENTS  OF  PRODUCTION 

The  same  result  is  reached  by  approaching  the  subject  from  the 
side  of  demand,  and  regarding  the  disadvantage  of  waiting  as  reduc- 
ing the  purchaser's  demand  (as  distinguished  from  the  borrower's  de- 
mand) for  capital  instead  of  checking  its  supply.  It  is,  generally 
speaking,  the  amount  which  purchasers  will  pay  for  it  which  consti- 


INTEREST  AND  COST  OF  CAPITAL 


547 


tutes  the  reward  of  the  makers  of  capital  and  serves  as  an  inducement 
to  continue  the  work  of  production.  So  long  as  the  purchaser's  de- 
mand will  give  plows,  for  example,  a  price  equal  to  the  cost  of  pro- 
ducing them,  the  producers  will  continue  their  work.  As  already 
pointed  out,  if  there  were  no  disadvantage  connected  with  saving, 
men  might  be  expected  to  pay  as  much  in  cash  for  a  piece  of  capital 
as  they  expect  it  to  return  them  in  the  way  of  income  during  its  life- 
time. In  that  case  the  purchaser's  demand  curve  for  capital  would 


E 


V*^^  B 

IN-TEREST 

\ 

\ 
\ 

^>£' 

F 

\ 

I--'' 

"~^ 

G 

-        " 

s 
x 

X 

^^ 

TOTAL  PRESE 

NT 

' 

VALUE  OF  CAP 

ITAL 

xxx                   v"-vv 

x>--^ 

K 


M 


coincide  with  the  productivity  curve  of  the  foregoing  diagram.  There 
would  then  be  an  equilibrium  of  supply  and  demand  at  the  point 
where  the  demand-productivity  curve  EC  intersects  the  cost  curve 
GB'.  But  since  there  is  a  certain  disadvantage  connected  with  saving, 
and  men  are  not  always  willing — not  even  those  who  inveigh  against 
interest  on  capital  —  to  pay  as  much  in  cash  or  present  consumable 
goods  for  a  piece  of  capital  as  it  will  produce  during  its  lifetime,  the 
purchaser's  demand  curve  does  not  coincide  with  the  productivity 
curve,  and  the  equilibrium  of  demand  and  supply  is  reached  at  some 
other  point. 

This  way  of  approaching  the  problem  may  be  illustrated  by  means 
of  the  above  diagram,  which  is  a  modification  of  that  on  page  545. 
The  purchaser's  demand  for  capital  is,  in  this  case,  represented 


548  PRINCIPLES  OF  NATIONAL  ECONOMY 

by  the  descending  curve  HM,  which  bears  the  same  relation  to 
the  productivity  curve  EC  as  the  abstinence  curve  HB  bore  to  the 
cost  curve  GB'  in  the  last  diagram.  Where  this  demand  curve  is 
above  the  productivity  curve  it  means  that  men  are  so  anxious  to  pro- 
vide against  the  uncertainties  of  the  future  that  they  will  give  a 
larger  number  of  present  goods  for  the  sake  of  having  a  smaller  num- 
ber at  some  time  in  the  future,  or  that  men  of  enormously  large  in- 
comes would  have  so  much  trouble  trying  to  consume  them  all  that 
they  would  rather  invest  a  part  in  some  enterprise  for  the  sport  of 
carrying  it  through,  even  though  they  may  never  get  all  their  money 
back,  while  men  of  moderate  incomes  would  rather  provide  against 
a  rainy  day  than  to  consume  all  their  incomes,  even  though  their 
savings  shrink  in  the  interval.  Yet  if  the  enterprises  return  a  surplus, 
and  the  savings  expand,  both  classes  of  savers  will  take  advantage  of 
the  possibility  of  getting  an  increase.  Where  the  demand  curve  coin- 
cides with  the  productivity  curve,  it  means  that  there  is  neither 
advantage  nor  disadvantage  connected  with  saving ;  and  where  the 
demand  curve  falls  below  the  productivity  curve,  it  means  that  there 
is  a  disadvantage  connected  with  saving,  and  therefore  less  will  be 
paid  for  a  piece  of  capital  than  it  will  earn  in  the  future. 

Under  these  conditions  the  equilibrium  of  demand  and  supply, 
which  determines  the  present  selling  value  of  agents  of  production, 
would  be  reached  when  the  supply  of  capital  was  represented  by  the 
line  AD,  for  this  would  be  the  point  where  the  purchaser's  demand 
for  the  different  forms  of  capital  would  give  them  a  value  just  equal 
to  their  marginal  cost  of  production.  Yet  the  marginal  productivity 
of  that  amount  of  capital  would  be  represented  by  the  line  DB ;  the 
present  selling  value  of  capital,  which  is  equivalent  to  the  present 
value  of  its  future  product,  would  be  represented  by  the  line  DI ;  and 
the  surplus  which  would  come  to  the  buyer  who  took  it  at  its  present 
selling  value  and  waited  for  its  earnings  to  mature  would  be  repre- 
sented by  the  line  IB.  The  total  present  value  of  all  now-existing 
capital  would  be  represented  by  the  parallelogram  ADF'I;  its  total 
future  earnings,  computed  on  the  basis  of  its  marginal  productivity, 
by  the  parallelogram  ADFB  ;  and  the  total  interest  or  surplus  which 
would  come  to  those  who  buy  the  capital  at  its  present  value  and 
wait  for  its  product  to  mature  would  be  represented  by  the  parallelo- 
gram F'IFB.  The  annual  interest  would  have  to  be  computed  by 
dividing  this  gross  amount  by  the  average  lifetime  of  the  now-existing 


INTEREST  AND  COST  OF  CAPITAL  549 

capital.  This  would  give  the  lump  sum  going  as  interest  to  the  own- 
ers of  capital  each  year.  The  annual  rate  of  interest  would  have  to 
be  computed  by  finding  what  percentage  the  annual  interest  is  of  the 
total  present  value  of  the  capital.1 

The  foregoing  theory  of  interest,2  though  based  largely  on 
the  marginal-utility  theories  of  value  and  price  as  worked  out 
by  such  writers  as  Jevons,  Marshall,  Bohm-Bawerk,  and  others, 
yet  lays  rather  more  emphasis  on  automatic  or  costless  saving 
than  those  writers  had  done.  It  has  led  some  later  writers  to 
the  rather  hasty  conclusion  that  since  a  great  deal  of  the  capital 
actually  saved  is  saved  without  cost,  therefore  interest  could 
practically  be  abolished  or  taxed  away  without  greatly  reducing 
the  amount  of  saving  or  the  supply  of  capital.3  Such  a  con- 
clusion is  of  doubtful  validity.  In  the  first  place,  there  is  not 
a  great  deal  of  automatic  or  costless  saving  except  among  people 
who  have  already  developed  great  economic  foresight  and 
acquired  more  or  less  fixed  habits  of  thrift.  Only  they  save 
automatically.  Had  it  not  been  for  the  observed  advantages  to 
be  gained  through  these  habits  it  is  doubtful  whether  they  could 
ever  have  reached  a  high  development  among  any  people.  One 
of  the  several  advantages  of  thrift  would  be  destroyed  if  interest 
were  taxed  away.  If,  after  generations  of  experience,  habits  of 
thrift  are  once  developed,  the  mere  momentum  of  those  previ- 
ously acquired  habits  might  conceivably  carry  on  the  work  of 
saving,  for  a  time  at  least,  in  spite  of  this  diminution  in  the  total 
advantage  of  saving ;  but  it  would  be  difficult  to  develop  these 
habits  still  further,  and  it  is  doubtful  if  they  could  be  main- 
tained indefinitely  even  at  their  present  level  if  one  of  the 
inducements  were  removed.  Again,  if  interest  were  destroyed 

aT.  N.  Carver,  The  Distribution  of  Wealth,  pp.  242-249.  The  Macmillan 
Company,  New  York. 

2  It  was  set  forth  in  a  paper  read  before  the  Economic  Seminar  of  Johns 
Hopkins  University  in  January,  1893,  and  published  in  the  Quarterly  Journal 
of  Economics  for  October  of  that  year.  Professor  Commons  had  arrived  inde- 
pendently at  the  same  conclusion  at  about  the  same  time. 

3Cf.  Cassel,  The  Nature  and  Necessity  of  Interest,  especially  A.  B.  Wolfe, 
Savers'  Surplus  and  the  Interest  Rate,  Quarterly  Journal  of  Economics  (Novem- 
ber, 1920),  Vol.  XXXV,  No.  i. 


550  PRINCIPLES  OF  NATIONAL  ECONOMY 

or  taxed  away  it  would  reduce  the  incomes  of  those  who  had 
shown  the  propensity  to  save,  either  automatically  or  for  the 
deliberate  purpose  of  getting  interest.  They  would  therefore 
have  less  from  which  to  save.  Granting  that  others  would  find 
their  incomes  correspondingly  increased,  still,  these  would  nec- 
essarily be  the  ones  who  had  not  previously  saved  much  capital, 
and  the  probabilities  are  against  the  assumption  that  they  will 
now  save  enough  to  compensate  for  the  diminution  in  the 
amount  saved  by  the  previous  savers. 

Another  error  or  oversight  of  those  who  argue  that  interest 
might  be  destroyed  or  taxed  away  without  greatly  reducing  the 
total  saving  is  the  assumption  that  only  a  few  marginal  savers 
would  be  affected,  or  that  the  great  mass  of  savers  are  not 
marginal  savers  and  would  not  be  affected  by  such  a  policy. 
As  a  matter  of  fact,  every  saver  is  probably  a  marginal  saver  to 
some  extent ;  that  is,  every  saver  is  probably  induced  to  save  a 
little  more  when  interest  is  possible  than  he  would  be  induced 
to  save  if  he  were  not  permitted  to  receive  interest.  Marginal 
saving  takes  place,  therefore,  along  an  extended  line  and  not 
simply  upon  a  single  point  on  that  line.  If  practically  every 
saver  in  a  vast  number  were  to  save  only  a  little  less  when  the 
inducement  of  interest  is  removed,  there  would  be  a  considerable 
reduction  in  the  total  saving. 


CHAPTER  XL 

PROFITS 

What  are  profits  ?  Profits  may  be  broadly  defined  as  the  in- 
come of  the  independent  business  man  who  receives  neither 
stipulated  wages,  rent,  nor  interest.  In  a  somewhat  narrower 
sense  they  include  whatever  he  has  left  over  after  he  has  al- 
lowed himself  interest  on  his  own  capital,  rent  for  his  own 
land,  and  wages  for  his  own  labor.  This  would  seem  to  narrow 
the  meaning  of  profits  down  to  the  reward  for  taking  risk, 
though  risk  must  be  defined  rather  broadly.  The  enterpriser, 
as  the  independent  business  man  may  with  fair  accuracy  be 
called,  is  essentially  the  man  who  undertakes  something  and 
relieves  others  of  a  part  at  least  of  the  risk  which  they  would 
otherwise  have  to  take. 

It  would  be  quite  possible,  for  example,  for  a  group  of  labor- 
ing men  to  borrow  capital,  build  their  own  factory,  and  run  it. 
But  if  they  did  so  they  would  always  be  in  danger  of  losing  not 
only  what  they  themselves  had  invested  but  even  their  wages 
for  a  time ;  that  is  to  say,  if  there  should  come  a  bad  season, 
when  the  demand  for  products  fell  off,  they  might  have  to  work 
for  very  low  wages  or  for  none  at  all.  If  some  individual  or 
group  of  individuals  will  undertake  to  run  the  business  for 
them  and  guarantee  them  a  certain  fixed  rate  of  wages,  they 
are  relieved  of  a  part  of  that  risk. 

Profits  as  payment  for  insurance.  Again,  the  men  who  fur- 
nish the  capital  may  jointly  assume  all  the  risks  of  the  enter- 
prise. They  may,  however,  be  in  part  relieved  by  having  one 
individual  or  group  of  individuals  undertake  the  business  and 
guarantee  them  interest  on  their  capital.  In  such  a  case,  how- 
ever, the  enterprisers  usually  have  to  invest  some  of  their  own 
capital.  In  such  cases  they,  the  enterprisers,  put  their  own 

551 


552  PRINCIPLES  OF  NATIONAL  ECONOMY 

capital  in  the  most  hazardous  position.  This  is  virtually  the 
distinction  between  common  stock  and  preferred  stock  in  a 
corporation.  Those  who  own  the  common  stock  take  the 
greater  risk.  So  long  as  the  enterprise  is  running  at  all,  the 
owners  of  the  preferred  stock  must  get  their  interest,  whether 
the  owners  of  the  common  stock  get  anything  or  not;  but  if 
the  enterprise  is  very  successful,  the  owners  of  the  common 
stock  get  larger  returns  than  the  owners  of  the  preferred  stock. 
These  larger  returns  over  and  above  the  rate  of  interest  will 
be  called  profits. 

The  lure  of  an  enterprise.  In  a  smaller  business,  run,  let  us 
say,  by  an  individual  rather  than  by  a  corporation,  the  in- 
dividual may  borrow  a  part  of  his  capital,  and  in  this  case,  so 
long  as  he  is  in  business  at  all,  he  must  pay  interest  on  what  he 
borrows,  whether  he  has  anything  left  for  himself  or  not.  In 
case  the  business  succeeds  very  well  he  gets  a  surplus  which 
may  be  called  profit.  The  lender  of  borrowed  capital  gets  no 
more  than  the  stipulated  rate  of  interest.  It  is  the  function  of 
the  independent  business  man  or  the  enterpriser  to  insure  the 
other  participants  in  the  industry  against  at  least  a  part  of  their 
risk.  He  cannot,  of  course,  relieve  them  of  all  risks.  Any  in- 
come which  the  insurer  gets  over  and  above  the  normal  rate  of 
interest  on  the  capital  which  he  himself  puts  in  may  be  called 
profit.  This  is  the  lure  which  induces  men  to  undertake  risks 
of  this  kind. 

This  suggests  a  functional  theory  of  profits  which  fits  in  with 
the  functional  theories  of  value,  wages,  and  interest  already 
described  in  the  previous  chapters.  The  function  of  high  prof- 
its is  to  induce  a  larger  number  of  men  to  undertake  independ- 
ent enterprises.  Where  a  larger  number  of  such  enterprises 
are  needed,  there  are  only  two  ways  of  getting  them  started. 
One  is  for  the  community  as  a  whole  to  take  a  part  of  the  social 
income  and  by  authority  invest  it  in  new  enterprises  ;  the  other 
is  to  offer  a  special  inducement  to  private  individuals  to  under- 
take the  new  enterprises  voluntarily.  This  is  usually  done  by 


PROFITS  553 

the  offer,  on  the  open  market,  of  high  prices  for  the  products 
of  the  enterprise. 

Necessity  of  taking  risk.  Risk-taking  is  no  more  meritorious 
in  itself  than  is  waiting  or  working.  It  is  meritorious  only  when 
it  results  in  increased  production  and  well-being.  Still,  the 
well-being  of  society  or  the  increased  production  of  the  goods 
which  society  needs  makes  it  absolutely  necessary  that  some 
risks  should  be  taken.  Risk  is  therefore  something  which  can- 
not be  avoided.  These  risks  are  of  many  kinds  and  degrees. 
The  tastes  of  the  people  may  change  so  that  the  product  of  a 
contemplated  enterprise  may  be  no  longer  desired.  Some  new 
invention  may  render  obsolete  the  processes  used  and  the  ma- 
chinery which  has  been  installed.  Strikes,  insurrections,  wars, 
and  unforeseen  physical  calamities,  such  as  fires,  storms,  and 
earthquakes,  must  also  be  taken  into  account.  It  would  be  very 
difficult  to  imagine  any  productive  undertaking  that  did  not 
involve  risk.  In  the  case  of  the  farmer  bad  weather,  insect 
pests,  and  diseases  of  all  kinds  threaten  to  decrease  or  destroy 
his  income.  Risk-taking  is  therefore  as  necessary  as  working 
or  waiting  in  order  to  get  effective  production  under  way. 

Irksomeness  of  risk.  Unless,  however,  risk-taking  were  in 
some  way  irksome  or  disagreeable,  it  would  not  deter  men  from 
entering  business,  and  there  would  be  nothing  here  that  would 
have  to  be  paid  for.  That  is  to  say,  if  people  did  not  dislike  to 
take  risks  there  would  be  no  hesitancy  in  entering  a  risky  occu- 
pation. It  would  therefore  not  be  necessary  to  offer  a  reward  to 
induce  men  to  enter  it.  In  fact,  so  many  would  crowd  into  haz- 
ardous enterprises,  and  so  increase  the  competition,  as  to  leave 
no  surplus  for  risk-takers  as  a  class,  the  losses  of  some  balancing 
the  gains  of  the  others.  This  is  what  actually  happens  in  those 
fields,  such  as  pure  gambling,  where  men  gamble  for  the  excite- 
ment. But  since  risk-taking  is  sometimes  irksome  or  disagree- 
able and  since,  in  such  cases,  men  would  rather  not  hazard 
their  accumulations  and  their  present  income,  they  must  be 
paid  something  as  a  lure,  or  attraction  to  overcome  this  dis- 


554  PRINCIPLES  OF  NATIONAL  ECONOMY 

inclination.  So  few  crowd  into  these  enterprises  as  to  leave  for 
those  who  do  make  the  venture  comparatively  little  competition. 
This  enlarges  their  opportunities  for  a  profit  and  may  leave 
the  whole  class  with  a  surplus.  The  reason  here  is  precisely  the 
same  as  the  reason  for  paying  wages  or  interest  or  for  paying 
the  price  of  any  commodity.  The  function  of  price,  in  a  free 
country,  is  to  overcome  the  disinclination  to  work,  wait,  or 
take  risks.  Risk  is,  in  such  cases,  a  part  of  the  cost  which 
the  price  must,  in  the  long  run,  cover. 

It  has  already  been  suggested  that  some  risk  is  not  burden- 
some and  in  many  cases  is  actually  exhilarating  and  attractive. 
The  tendency  to  gamble  is  so  strong  in  some  people  as  to  lead 
them  to  hazard  not  only  wealth  but  even  life  and  limb  on  dan- 
gerous enterprises.  Different  individuals,  of  course,  differ  in 
this  respect,  as  they  do  in  the  inclination  or  the  disinclination  to 
work  or  to  wait.  There  are  also  different  kinds  of  hazards 
which  appeal  to  different  people.  A  study  of  lotteries  shows 
that  there  is  a  greater  propensity  to  hazard  small  sums,  even 
on  the  remote  chance  of  winning  a  large  prize,  than  to  hazard 
a  large  sum  on  the  chance  of  winning  a  small  prize,  even  when 
the  chance  is  so  large  as  to  amount  almost  to  a  certainty.  This 
might  be  tested  by  a  laboratory  experiment.  The  student  is 
advised,  however,  not  to  try  an  actual  experiment  of  this  kind, 
because  it  is  against  the  law ;  but  it  is  not  against  the  law  to 
imagine  such  an  experiment,  and  he  is  therefore  recommended 
to  try  the  experiment  in  imagination. 

Let  him,  in  imagination,  offer  for  sale  two  kinds  of  lottery 
tickets,  contained  in  boxes  which  we  will  designate  as  Box  A  and 
Box  B.  Let  him  put  in  Box  A  2000  tickets,  all  of  which  are 
blanks  but  one.  Let  this  one  be  good  for  $1000.  In  Box  B  let 
him  put  2000  tickets,  only  one  of  which  is  a  blank,  all  the  rest 
being  good  for  Siooo  each.  Let  him  experiment  by  trying  to  sell 
these  two  sets  of  tickets  and  see  what  price  he  can  get  for  them. 
Now  mathematically  the  tickets  in  Box  A  are  worth  50  cents 
apiece  ;  that  is  to  say,  one  who  bought  them  all  at  50  cents  apiece 
would  neither  gain  nor  lose.  Those  in  Box  B  are  mathematically 


PROFITS  555 

worth  $999.50  each  (that  is  to  say,  one  who  bought  all  the 
tickets  at  that  price  would  neither  gain  nor  lose),  but  the 
market  price,  or  the  price  at  which  they  will  actually  sell,  would 
probably  differ  from  the  mathematical  value.  It  is  quite  prob- 
able that  the  tickets  in  Box  A  would  easily  sell  for  more  than 
50  cents  apiece,  possibly  a  dollar  apiece, — at  least  the  experi- 
ence with  lotteries  in  the  past,  when  they  were  legal,  would 
lead  one  to  believe  this, — and  yet  every  buyer  would  be  paying 
twice  as  much  as  the  tickets  were  worth.  It  is  extremely  im- 
probable that  the  tickets  in  Box  B  would  sell  for  anything 
approximating  their  mathematical  value.  It  is  doubtful  whether 
they  would  sell  for  $900  each.  If  they  did,  each  buyer  would 
be  getting  his  ticket  for  much  less  than  it  was  mathematically 
worth.  No  lottery  ever  did  or  ever  could  afford  to  sell  tickets 
like  those  in  Box  B. 

Now  occasionally  there  is  a  business  risk  that  resembles 
somewhat  the  buying  of  one  of  the  tickets  in  Box  A.  A  great 
deal  of  gold-mining  stock  has  been  sold  on  the  market  under 
these  conditions.  The  shares  usually  sell  at  a  very  low  price, 
and  there  is  a  very  remote  chance  of  ever  getting  anything 
back ;  and  yet  once  in  a  great  while  a  large  prize  is  drawn.  It 
is  the  belief  of  careful  observers  that  more  money  has  been 
spent  on  the  shares  of  gold-mining  companies  than  all  the  gold 
mines  have  ever  yielded.  In  other  words,  here  is  a  field  where 
there  are  literally  no  profits  for  investors  as  a  class,  the  losses 
exceeding  the  gains.  The  reason  seems  to  be  the  psychological 
one  that  this  kind  of  risk  is  not  irksome  but  is  in  itself  attractive. 

The  ordinary  conservative  business  risk,  however,  more 
nearly  resembles  the  buying  of  a  ticket  from  Box  B.  The 
shares  of  a  conservatively  managed  corporation,  for  example, 
in  a  somewhat  standardized  business  usually  sell  at  a  fairly 
high  price.  The  prizes  to  be  drawn  or  the  profits  to  be  made 
are  usually  small,  though  fairly  safe,  as  compared  with  mining 
stock.  There  is  very  little  in  this  that  appeals  to  the  gambling 
spirit.  There  is  a  certain  irksomeness  about  it  and  a  disin- 
clination to  this  kind  of  risk-taking.  The  result  is  that  such 


556  PRINCIPLES  OF  NATIONAL  ECONOMY 

shares  generally  sell  for  less  than  their  mathematical  value, 
so  that  investors  as  a  class  make  somewhat  more  than  they 
lose.  There  is,  in  other  words,  a  real  surplus  here  that  may  be 
called  profits. 

That  part  of  a  business  man's  income  which  comes  to  him 
because  of  his  function  as  a  risk-taker,  or  because  he  relieves 
certain  others  of  a  portion  of  the  risk  they  would  otherwise 
have  to  take,  is  somewhat  analogous  to  the  earnings  of  an  in- 
surance company.  The  only  possibility  by  which  an  insurance 
company  could  earn  anything  is  by  collecting  more  from  the 
people  insured  in  the  way  of  premiums  than  it  pays  to  them  for 
their  losses.  Of  course  if  the  insurance  company  receives  more 
from  the  insured  than  it  pays  them  in  the  form  of  indemnifica- 
tion for  losses,  they,  in  turn,  must  pay  the  insurance  company 
more  than  they  ever  receive  back  for  their  losses.  Why  do  they 
do  this  ?  In  the  main,  because  of  the  irksomeness  of  risk,  they 
are  willing  to  pay  something  more  than  they  ever  receive  back, 
for  the  comfort  of  feeling  safe.  Similarly,  the  laboring  man, 
whether  he  works  for  wages  or  a  salary,  is  willing  to  give  in 
the  form  of  service  a  somewhat  greater  value  than  he  ever 
receives,  for  the  comfort  of  feeling  safe.  That  is  to  say,  a 
group  of  laborers  who  assumed  their  own  risks  by  owning  and 
operating  their  own  factory  might,  in  the  course  of  many  years, 
receive  more  on  the  average  than  they  would  receive  if  they 
worked  for  wages,  but  they  would  always  be  more  or  less 
anxious  or  worried  about  the  condition  of  the  market  and  the 
possibility  of  having  to  go  some  weeks  or  even  months  without 
any  wages  at  all.  This  sort  of  worry  would  be  so  irksome 
that  most  of  them  would  prefer  to  receive  a  little  less  and  be 
certain  of  getting  it  than  to  have  the  prospect  of  receiving  a 
little  more  in  the  long  run  without  feeling  the  same  degree  of 
certainty.  The  employer  who  thus  insures  them  may  find  him- 
self with  a  surplus  for  much  the  same  reason  that  an  insurance 
company  does.  There  is  the  same  risk  and  presumably  the 
same  justification  in  one  case  as  in  the  other. 


PROFITS  557 

Relation  of  risk  to  abstinence.  There  is  a  close  parallelism 
between  the  part  played  by  risk  in  the  determination  of  profits, 
by  abstinence  in  the  determination  of  interest,  and  by  cost 
production  in  the  determination  of  the  price  of  a  reproducible 
commodity.  It  was  pointed  out  in  Chapter  XXXIX,  on  The 
Cost  of  Capital  and  its  Relation  to  Interest,  that  the  necessity 
of  waiting,  combined  with  the  fact  that  waiting  beyond  a  cer- 
tain point  is  disagreeable,  tends  to  reduce  the  present  price  of  a 
piece  of  capital  to  something  less  than  the  sum  of  its  future 
earnings.  The  one  who  buys  it  at  its  present  selling  price  and 
waits  for  its  earnings  to  mature  will  normally  and  in  the  long 
run  find  himself  in  the  possession  of  a  surplus  as  the  result  of 
his  waiting.  Since  men  are  generally  disinclined  to  waiting, 
they  never  bid  against  one  another  for  the  possession  of 
future  goods  vigorously  enough  to  raise  their  present  price 
to  the  level  of  the  sum  of  their  future  earnings.  The  result  of 
this  is  that  the  normal  selling  price  of  a  piece  of  capital  is  low 
enough  to  allow  its  purchaser  a  surplus.  In  a  similar  way  the 
risk  connected^  with  carrying  on  any  enterprise,  particularly  a 
new  enterprise  in  a  changing  society,  may  reduce  the  present 
value  of  the  whole  equipment  somewhat  below  the  probable 
value  of  its  products  even  after  allowance  is  made  for  interest. 
Because  of  the  general  disinclination  to  assume  risks  of  the 
kind  ordinarily  met  with  in  business,  the  competitive  invest- 
ments (that  is,  the  competitive  buying  of  productive  goods  and 
embarking  on  productive  enterprises)  are  less  intense  than  they 
would  otherwise  be.  It  is  for  this  reason  that  those  who  under- 
take such  enterprises  may  be  expected,  in  the  long  run,  to  secure 
a  profit  over  and  above  the  interest  on  the  capital  which 
is  invested. 

It  was  also  pointed  out  in  Chapter  XXXIX  that  not  all 
waiting  is  irksome,  and  that  some  waiting  is  experienced  without 
any  hope  or  expectation  of  surplus  income.  The  parallelism  be- 
tween risk  and  waiting  may  be  carried  a  step  farther.  Not  all 
risk  is  irksome.  Some  risks  are  undertaken  for  the  sake  of  the 


558  PRINCIPLES  OF  NATIONAL  ECONOMY 

excitement.  Boys  sometimes  like  to  skate  over  thin  ice  just 
because  it  is  dangerous.  Men  sometimes  like  to  gamble  their 
money  just  because  it  is  dangerous.  All  sorts  of  risks  are 
taken  for  the  sheer  excitement  of  the  hazard.  When  you  find 
a  business  enterprise  which  appeals  to  the  gambling  instinct, 
men  will  be  found  so  eager  to  buy  or  to  invest  in  the  risk  as 
to  give  it  a  market  value  somewhat  greater  than  its  mathemati- 
cal or  economic  value.  Those  who  persist  in  buying  such  risks 
invariably  lose  in  the  long  run,  though  they  may  now  and  then 
win  on  some  individual  venture. 

Egotistic  belief  in  luck.  Adam  Smith  long  ago  pointed  out 
that  men  are  not  only  egotistical  regarding  their  own  abilities 
but  are  generally  rather  fond  believers  in  their  own  luck.  Even 
though,  they  are  convinced  that  mathematically  the  chances  are 
against  them,  their  egotism  leads  them  to  believe  that  their  own 
luck  may  offset  the  effect  of  mathematics.  Of  all  superstitions 
the  belief  in  luck  is  one  of  the  most  widespread.  It  is  this  sort 
of  superstitious  egotism  on  which  the  professional  gambler  and 
the  lottery  flourish.  • 

Relation  of  the  market  to  the  mathematical  value  of  a  risk. 
In  the  case,  however,  of  an  enterprise  which  does  not  appeal  to 
the  gambling  instinct,  men  are  generally  so  reluctant  to  invest 
that  the  market  value  of  the  risk  is  usually  somewhat  less  than 
its  mathematical  value.  Men  who  persist  in  buying  such  risks 
inevitably  gain  if  they  continue  long  enough  and  if  they  are 
not  ruined  by  their  early  losses.  In  the  class  of  risks  which 
appeal  to  the  gambling  instinct,  the  more  one  invests  the  more 
nearly  certain  one  is  to  lose.  If  one  were  to  buy  all  the  lottery 
tickets,  one  would  be  absolutely  certain  to  lose,  because  the 
lottery  sees  to  it  that  the  total  price  of  the  tickets  exceeds  the 
total  value  of  the  prizes.  In  the  other  class  of  risks — namely, 
those  which  do  not  appeal  to  the  gambling  instinct — the  mar- 
ket value  is  less  than  the  mathematical  value,  as  already  stated. 
It  follows  from  this  that  if  one  were  to  buy  all  such  risks  one 
would  be  absolutely  certain  to  gain,  for  the  sum  total  of  the 
market  values  is  less  than  the  sum  total  of  all  the  mathematical 


PROFITS  559 

or  economic  values.  Those  who  invest  in  the  gamblers'  risk  as 
a  class  lose  rather  than  gain ;  those  who  invest  in  the  ordinary 
business  risks  as  a  class  gain  rather  than  lose. 

The  question  of  the  residual  share.  In  view  of  all  that  has 
been  said,  it  is  safe  to  conclude  that  profits  are  made  up  of 
what  is  left  after  the  other  shares  have  been  paid.  This  does  not 
mean,  however,  that  profits  are  a  residual  share.  The  term 
" residual  share"  has  been  discussed  in  a  good  many  treatises 
on  economics.  By  a  residual  share  is  meant  the  only  share 
which  is  not  determined  independently.  It  has  sometimes  been 
argued,  for  example,  that  inasmuch  as  rent  is  determined  by 
a  law  which  works  independently  of  other  laws  of  distribu- 
tion, since  wages  are  determined  by  the  standard  of  living 
which  likewise  is  supposed  to  work  independently  of  other 
laws  of  distribution,  and  since  the  rate  of  interest  tends  to  work 
uniformly  through  the  community,  regardless  of  minor  changes, 
profits  are  therefore  undetermined  by  any  law  but  are  merely 
what  is  left  over  after  the  other  shares  are  accounted  for.  It 
is  quite  as  easy  to  show  that  any  other  share  is  a  residual  share 
in  this  sense  as  it  is  to  show  that  profits  are  a  residual  share. 

Many  years  ago  Walker  pointed  out  that  profits  are  deter- 
mined by  a  law  similar  to  that  of  rent  as  applied  to  land. 
Profits,  according  to  this  law,  are  determined  by  the  difference 
between  the  productivity  of  a  given  business  man  and  that  of 
the  least  efficient  business  man  who  could  manage  to  stay  in 
business.  The  latter  was  called  the  no-profit  business  man  or 
entrepreneur,  and  he  occupied  a  position  analogous  to  the  no- 
rent  land  on  the  margin  of  cultivation.  A  more  efficient  busi- 
ness man,  however,  could  reduce  the  cost  of  production  to  a 
point  somewhat  lower  than  this  no-profits  man  or  else  produce 
a  better  product,  which  would  sell  at  a  higher  price.  Herein  lay 
his  opportunity,  and  his  only  opportunity,  for  profits.  Assum- 
ing that  he  paid  the  same  rate  of  wages  and  interest  and  a  rent 
which  was  proportional  to  the  advantage  of  the  site,  his  only 
chance  of  doing  better  than  the  other  man  was  to  organize 
these  factors  more  effectively  and  to  supervise  them  more  dili- 


560  PRINCIPLES  OF  NATIONAL  ECONOMY 

gently  by  effecting  economies  which  the  other  man  was  unable 
to  effect.  He  would  then  find  himself  in  the  possession  of  a 
surplus.  Beginning  with  profits  and  accounting  for  them  by 
this  differential  law,  Walker  proceeded  to  show  that  rent  and 
interest  are  also  determined  by  definite  laws.  This  left  only 
wages  to  be  accounted  for.  Therefore  he  assumed  that  wages 
are  a  residual  share. 

One  may,  however,  prove  by  the  same  process  that  either  rent 
or  interest  is  a  residual  share.  It  all  depends  on  which  share 
you  consider  last  in  the  series.  The  result  of  this,  moreover, 
has  resolved  the  whole  doctrine  of  a  residual  share  into  an 
absurdity.  Since  the  independent  business  man,  or  the  entre- 
preneur, is  the  only  one  whose  income  is  not  the  result  of 
specific  bargaining,  and  since  he  is  the  only  one  who  does  not 
sell  his  services  for  a  definite  price,  he  may  be  said  to  receive 
whatever  is  left  over.  The  laboring  man  bargains  for  a  definite 
rate  of  wages ;  and  whether  the  business  is  making  a  profit  or  a 
loss  he  gets  these  wages  as  long  as  the  contract  stands.  The 
capitalist  lends  his  capital  at  a  definite  rate  of  interest  and  gets 
that  rate  of  interest  so  long  as  the  business  keeps  going,  whether 
it  is  making  a  profit  or  a  loss.  Similarly  with  the  landowner. 
But  the  entrepreneur  is  the  only  one  whose  income  hinges  on 
the  question  of  profit  or  loss  for  the  business  as  a  whole. 

The  business  man  the  chief  bargainer.  Every  participant  in 
a  competitive  enterprise  is  more  or  less  a  bargainer,  but  the 
independent  business  man  is  the  chief  bargainer  of  all.  When 
the  laboring  man  has  bargained  for  a  rate  of  wages,  the  rest 
of  his  work  consists  not  in  bargaining  but  in  working;  when 
the  capitalist  has  bargained  for  a  rate  of  interest,  that  is  the 
end  of  his  bargaining ;  and  so  with  the  landlord.  But  the  in- 
dependent business  man  is  the  bargainer  per  se ;  he  bargains 
for  everything — his  raw  materials,  his  help,  his  capital,  his  in- 
terest— and  he  also  bargains  with  the  purchasers  of  the  prod- 
uct. He  is  the  unbought  buyer  of  everything  and  the  unsold 
seller  of  everything  connected  with  the  business.  It  therefore 
happens  that  skill  in  bargaining  is  one  of  the  greatest  elements 


PROFITS  561 

in  his  success  in  securing  profits.  Bargaining,  however,  con- 
sists, in  the  first  place,  in  investing,  and  the  investment  of  capi- 
tal is  a  very  delicate  operation.  To  invest  successfully  one 
must  foresee  the  future  needs  of  the  community  as  expressed  in 
the  demands  of  the  market.  To  err  at  this  point  is  to  fail. 

Because  of  the  disinclination  of  the  average  man  toward 
taking  the  ordinary  risk,  the  competition  is  somewhat  intense 
for  the  safe  positions  of  the  laborer  and  the  lender  of  capital. 
The  intensity  of  this  competition  tends  to  keep  their  shares 
somewhat  lower  than  they  would  otherwise  be,  but  this  dis- 
inclination makes  the  competition  somewhat  less  intense  among 
the  business  men  who  have  to  assume  the  chief  risks.  This,  in 
turn,  leaves  them  with  somewhat  larger  incomes  than  they 
would  get  if  the  risks  were  less  irksome  and  the  competition 
more  intense.  The  surplus  income  which  comes  to  them  in  this 
way  is  called  profits. 

COLLATERAL  READING 

CARVER,  THOMAS  NIXON.  The  Distribution  of  Wealth.   New  York,  1904. 

MALTHUS,  T.  R.  An  Essay  on  the  Principle  of  Population  (ninth  edition), 
chaps,  i  and  ii.  London,  1888.  (Develops  the  famous  thesis  regarding  "the 
constant  tendency  of  all  animated  life  to  increase  beyond  the  nourishment 
prepared  for  it") 

MARSHALL,  ALFRED.  Principles  of  Economics  (fifth  edition),  Book  VI. 
New  York,  1907.  (Develops  the  idea  of  a  normal  equilibrium  of  demand  and 
supply  as  the  determining  factor  in  distribution.) 

RICARDO,  DAVID.  Principles  of  Political  Economy  and  Taxation,  chap.  ii. 
London,  1913.  (States  the  famous  Ricardian  theory  of  rent.) 

TAUSSIG,  F.  \V.  Wages  and  Capital.  New  York,  1896.  (A  clear  and 
convincing  exposition  of  the  relation  of  capital  to  wages.) 


PART  VI.    CONSUMPTION 


CHAPTER  XLI 

MEANING  AND  IMPORTANCE  OF  CONSUMPTION 

Two  meanings  of  the  word  "consumption."  There  have  been 
two  meanings  given  by  economists  to  the  term  u  consumption 
of  wealth."  By  one  group  it  has  been  made  to  include  any  utili- 
zation of  wealth  in  Which  the  wealth  is  worn  out,  used  up,  or 
destroyed  in  the  process ;  by  another  group  it  is  denned  as 
meaning  only  such  utilization  as  gives  direct  satisfaction  to  a 
consumer.  Under  the  first  definition  coal  is  consumed  when  it 
is  burned  to  make  steam  for  the  running  of  machinery  as  well 
as  when  it  is  burned  to  supply  warmth  for  the  comfort  of  the 
human  body;  under  the  second  definition  only  the  latter  use 
of  coal  would  be  called  consumption.  Those  who  hold  to  the 
first  definition  are  compelled  to  divide  consumption  into  two 
kinds ;  namely,  productive  consumption  and  unproductive 
consumption.  It  is  always  explained,  however,  that  the  term 
"unproductive  consumption"  does  not  mean  'useless  or  un- 
necessary consumption.  It  means  that  wealth  thus  consumed, 
in  contradistinction  to  that  which  is  productively  consumed, 
is  not  used  up  in  the  process  of  producing  other  wealth.  It  is 
used  rather  for  the  final  purpose  for  which  all  wealth  is  com- 
monly supposed  to  be  produced  ;  namely,  the  direct  satisfaction 
of  human  desires  or  needs.1 

The  tendency  among  recent  writers  is  to  use  the  term  "con- 
sumption" in  the  narrower  sense.  By  the  consumption  of 
wealth  under  this  definition  is  meant  the  culmination  of  the 
whole  economic  process  ;  namely,  the  satisfaction  of  human  de- 
sires. Wealth  which  is  worn  out  or  used  up  in  the  process  of 
production  is  not  itself  yielding  satisfaction  to  consumers 

1  Compare  the  author's  article  on  "Consumption"  in  the  Encyclopaedia 
Americana. 

565 


566  PRINCIPLES  OF  NATIONAL  ECONOMY 

directly.  It  is  yielding  it  indirectly,  or  helping  to  produce 
other  things  which  will  satisfy  consumers  directly. 

The  purpose  of  the  user  is  the  determining  factor.  Under 
modern  conditions  goods  are  used  either  for  direct  satisfaction 
or  for  the  getting  of  an  income.  If  they  are  being  used  for 
the  getting  of  an  income,  they  are  not  being  consumed  in  the 
economic  sense.  The  physician's  automobile  which  is  used 
in  his  profession  is  being  worn  out,  but  it  is  not  being  consumed 
in  this  sense.  When  the  same  automobile  is  used  for  his  own 
enjoyment  or  that  of  his  family,  it  is  being  consumed.  Again, 
a  thing  may  be  in  the  process  of  consumption  even  though  it  is 
being  used  up  very  slowly.  A  diamond  which  is  used  as  an 
article  of  pleasure  or  adornment  is  in  the  process  of  consumption, 
even  though  it  may  never  be  really  worn  out ;  but  when  it  is  a 
part  of  the  stock  of  the  jeweler,  like  the  rest  of  his  stock,  it  is 
being  used  for  the  purpose  of  getting  an  income.  A  substantial 
piece  of  furniture,  when  used  for  direct  satisfaction,  is  being 
consumed ;  but  while  it  is  in  a  furniture  store  the  immediate 
purpose  of  the  owner  is  to  gain  a  profit  from  it  rather  than  to 
enjoy  it,  and  therefore  it  is  not  yet  in  the  process  of  consumption. 
In  short,  the  consumer  of  an  article  is  the  one  whose  desires  it 
satisfies  directly.  The  article  begins  to  be  consumed  whenever 
it  begins  to  satisfy  a  consumer's  desires  directly ;  that  is,  when 
it  has  passed  through  all  the  channels  of  business  and  trade, 
where  it  is  used  for  the  purpose  of  getting  an  income,  and  comes 
into  the  possession  of  someone  for  whose  satisfaction  it  is 
designed. 

Importance  of  consumption.  Most  textbook  writers  on  eco- 
nomics have  regarded  the  consumption  of  wealth  as  a  department 
of  the  subject  coordinate  with  such  departments  as  production, 
exchange,  and  distribution.  None  of  them,  however,  has  given 
as  much  space  to  it  as  to  those  other  departments.  The  reason 
has  apparently  been  the  general  opinion  that  consumption  is 
essentially  an  individual  matter  with  which  the  public  has  had 
little  or  no  concern.  Laws  relating  to  consumption  have  been 
called  sumptuary  laws  and  have  generally  been  condemned  or 


CONSUMPTION  567 

only  half-heartedly  approved.  There  is  a  growing  opinion, 
however,  that  consumption  is  quite  as  important,  from  its  effect 
on  national  prosperity,  power,  and  greatness,  as  any  department 
of  economics.  Even  the  regulation  of  consumption,  as  in  the 
case  of  laws  regulating  or  prohibiting  the  use  of  alcoholic 
beverages,  is  becoming  popular.  Probably  no  movement  of  re- 
cent years  in  America  has  been  quite  so  popular  or  so  democratic 
as  the  prohibition  movement. 

The  importance  of  the  consumption  of  wealth  is  further 
emphasized  by  the  consideration  that  as  many  and  as  dire 
calamities  have  overtaken  nations  and  peoples  because  of  their 
irrational  habits  of  consumption  as  because  of  inefficient  sys- 
tems of  production,  exchange,  or  distribution.  In  fact,  con- 
sumption reacts  powerfully  upon  all  the  other  departments, 
particularly  upon  distribution.  It  was  shown  in  the  chapter 
on  What  determines  the  Rate  of  Wages  that  the  standard  of 
living  of  the  laboring  classes,  which  is  a  part  of  consumption, 
has  much  the  same  influence  upon  the  price  of  their  labor 
as  that  exercised  by  the  cost  of  production  upon  the  price  of 
a  material  commodity.  Again,  the  rate  of  the  accumulation  of 
capital,  upon  which  so  many  things  depend,  is  largely  deter- 
mined by  the  habits  of  consumption.  The  effect  of  luxury 
upon  industry  and  general  national  strength  is  one  of  the  largest 
of  all  questions.  These  illustrations  are  enough  to  show  that 
the  subject  of  consumption  deserves  the  most  careful  study 
and  the  most  serious  treatment  which  economists  can  give  it. 

Ratio  of  consumption  to  production.  In  a  profound  illumi- 
nating article  on  War  and  Economics,1  Dr.  E.  V.  Robinson  calls 
attention  to  the  fact  that  in  any  country,  when  its  production 
exceeds  its  consumption,  the  result  is  economic  progress,  but 
that  when  consumption  exceeds  production  the  result  is  eco- 
nomic retrogression.  When  production  exceeds  consumption, 
wealth  is  accumulating  and  taking  on  durable  forms ;  when 
consumption  exceeds  production  the  national  wealth  shrinks, 
and  the  nation  lives  on  its  accumulated  capital  and,  more- 

1  Political  Science  Quarterly  (December,  1900),  Vol.  XV,  p.  581. 


568  PRINCIPLES  OF  NATIONAL  ECONOMY 

over,  allows  its  accumulated  fund  of  durable  wealth  to  deterio- 
rate. Since  it  spends  little  time  and  energy  in  keeping  its 
durable  wealth  in  repair  or  its  volume  intact,  but  spends  most 
of  its  time  and  energy  in  producing  ephemeral  goods  for  imme- 
diate self-gratification,  its  great  architectural  monuments,  if  it 
has  any,  sink  into  decay;  its  buildings  become  dilapidated  for 
the  same  reason  ;  its  soil  becomes  depleted  because  no  energy  is 
spent  in  conserving  its  fertility ;  the  people  live,  as  it  were, 
from  hand  to  mouth,  and  everything  tends  downwards. 

When  production  exceeds  consumption,  on  the  other  hand, 
not  only  are  durable  forms  of  wealth  conserved — kept  in  repair 
and  intact — but  they  are  continually  improved  and  new  forms 
produced.  There  is  energy  to  spare  from  the  work  of  producing 
ephemeral  articles  for  immediate  consumption,  and  time  is  de- 
voted to  permanent  works  and  new  forms  of  construction. 
Durable  goods  multiply  in  quantity,  capital  accumulates,  more 
and  better  tools  and  equipment  are  provided,  and  productive 
power  accumulates  by  a  kind  of  geometrical  progression. 

Whether,  in  the  nation  at  large,  production  exceeds  consump- 
tion or  not  depends  on  the  general  habits  of  the  average  person. 
If  the  average  person  demands  large  quantities  of  those  things 
which  supply  physical  and  temporary  satisfaction,  such  as  lux- 
urious food  and  drink,  fashionable  clothing,  and  expensive 
amusements,  there  will  be  a  tendency  for  consumption  to  exceed 
production.  If,  however,  the  average  citizen  is  satisfied  with 
the  kind  of  food  which  nourishes,  and  increases  strength  and 
efficiency,  with  clothing  which  affords  comfort  and  conven- 
ience, with  amusements  which  are  inexpensive  and  which  tend 
to  preserve  the  health,  strength,  and  agility  of  both  mind  and 
body,  there  will  be  a  tendency  for  wealth  to  accumulate. 

Other  factors  are,  however,  involved.  There  might  be  a  popu- 
lation with  simple  habits  such  as  we  have  indicated,  but  with  no 
desire  for  the  durable  satisfactions  of  life  and  with  little  energy 
to  devote  to  production.  Such  a  population  would  necessarily 
remain  in  a  low  state  of  civilization.  It  would  not  provide 
abundantly  either  for  the  temporary  or  for  the  permanent  means 


CONSUMPTION  569 

of  satisfaction,  but  would  remain  in  sloth  and  squalor.  But  if, 
in  addition  to  the  simple  habits  of  consumption  so  far  as  food, 
clothing,  and  amusements  were  concerned,  the  average  person 
possessed  an  intense  desire  for  durable  goods,  —  for  architecture, 
libraries,  schools,  and  other  civilizing  agencies,  —  the  conditions 
would  be  favorable  to  the  accumulation  of  wealth  and  to  all 
forms  of  economic  progress.  If,  in  addition  to  all  these,  the 
average  person  were  energetic  and  not  disinclined  toward  work, 
—if  he  were  willing  to  study  hard  and  work  hard,  and  if  his 
motives  were  such  as  to  drive  his  mind  and  body  at  high  speed,  — 
the  conditions  would  be  still  more  favorable.  This  combination 
of  favorable  conditions  would  make  progress  almost  a  necessity. 
Nothing  except  a  geological  cataclysm  or  a  world  war  would 
prevent  such  a  people  from  advancing  in  the  arts  of  civilization. 

Preference  for  durable  goods.  It  is  to  be  borne  in  mind  that 
the  motives  and  desires  of  people  are  fundamental  to  this  prob- 
lem. As  was  shown  in  a  previous  chapter,  any  people  can  have 
as  much  progress  and  as  high  a  state  of  civilization  as  they 
desire,  provided  they  desire  them  strongly  enough  and  are 
willing  to  pay  the  price. 

Value  of  a  man.  From  the  standpoint  of  national  prosperity 
the  value  of  the  individual  depends  on  the  excess  of  his  produc- 
tion over  his  consumption.  The  following  formula  will  deter- 
mine with  mathematical  accuracy  how  much  a  person  is  worth 
from  the  standpoint  of  national  prosperity  : 


In  this  formula  V  stands  for  value  (that  is,  the  value  of  the 
man);  P  stands  for  his  production;  C,  for  his  consumption. 
Thus  the  formula  reads,  The  value  of  the  man  equals  his  pro- 
duction minus  his  consumption.  In  the  cases  where  his  con- 
sumption exceeds  his  production  his  value  is  negative  ;  he  is  a 
drag  on  progress,  and  the  world  will  at  least  save  his  victuals 
when  he  1'eaves  it. 

The  whole  life  is  the  unit.  Lest  this  be  too  hastily  inter- 
preted, it  should  be  pointed  out  that  a  human  life  as  a  whole, 


570  PRINCIPLES  OF  NATIONAL  ECONOMY 

and  not  a  fragment  of  it,  should  be  regarded  as  a  unit.  The 
consumption  of  a  child  exceeds  his  production,  but  this  does  not 
condemn  him.  So,  likewise,  during  the  declining  years  of  those 
who  reach  a  good  old  age  consumption  may  exceed  production, 
but  this  does  not  condemn  the  life.  If  the  life  as  a  whole 
produces  more  than  it  consumes,  it  leaves  the  world  richer  by 
that  difference. 

Again,  production  should  be  given  a  very  wide  interpreta- 
tion. One  may  produce  without  handling  material  goods  of 
any  kind,  but  by  inspiring  the  productive  virtues  in  others,  by 
teaching  productive  skill  to  other  people,  by  scientific  investi- 
gation, by  transmitting  knowledge,  and  in  various  other  ways. 
If,  after  making  all  allowance  for  these  different  forms  of  pro- 
ductivity, the  mature  individual  in  sound  health  finds  that  he 
is  producing  less  than  he  is  consuming,  it  is  time  for  him  to 
begin  to  consider  his  ways  and  to  experience  a  change  of  heart. 
He  needs  to  be  converted  from  a  waster  into  a  producer. 

Boarders  at  the  national  table.  Dairymen  sometimes  use  the 
term  " boarder"  to  describe  a  cow  whose  feed  and  care  cost 
more  than  her  milk  is  worth.  Every  wise  dairyman  tries  to  get 
rid  of  his  boarders  and  keep  only  those  cows  whose  production 
exceeds  their  consumption.  The  formula  V=P  —  C  applies  very 
clearly  to  the  value  of  the  cow.  A  wise  farmer  would  not  keep 
a  horse  whose  production  did  not  exceed  his  consumption. 
A  manufacturer  would  discard  a  machine  which  required  so 
much  power,  care,  oil,  repairs,  etc.  as  to  exceed  the  value  of 
its  product.  It  would  seem  that  men  ought  to  be  held  to  at 
least  as  high  a  standard  as  that  to  which  cows,  horses,  and 
machines  are  held.  A  man  who  falls  below  that  standard 
is  as  much  of  a  drain  upon  his  country  as  is  the  cow,  horse, 
or  machine. 

The  class  of  boarders  includes  not  simply  the  tramps  and 
beggars  but  everyone  else  who  is  not  usefully  engaged,  even 
though  he  or  she  lives  upon  his  wife's  or  her  husband's  earnings, 
his  wife's  or  her  husband's  fortune,  or  upon  inherited  wealth. 
The  class  includes  even  others.  Even  those  who  are  usefully 


CONSUMPTION  571 

engaged  may  be  consuming  such  expensive  products  and  may 
require  so  many  servants  to  wait  upon  them  as  to  use  up  more 
man  power  than  they  replace  by  their  own  work.  It  would  be 
an  interesting  exercise  in  patriotism  if  every  mature  person 
should  ask  himself  seriously  whether  the  country  is  the  gainer 
or  the  loser  by  reason  of  his  existence,  whether  the  man  power 
required  to  produce  for  him  and  take  care  of  him  is  greater 
or  less  than  the  man  power  which  he  contributes  to  the  nation's 
fund  of  productive  energy  by  his  own  work. 

The  conservation  of  man  power.  The  importance  of  this  con- 
sideration is  peculiarly  clear  in  a  time  of  great  national  crisis, 
such  as  the  World  War  of  191 4-1 91 8;  when  all  the  liberal 
nations  were  at  death  grips  with  a  military  autocracy.  The 
necessity  of  conserving  every  ounce  of  man  power  was  upon 
every  nation.  WTe  saw  clearly  then  that  anyone  who  was  not 
usefully  engaged  was  a  menace  rather  than  a  help  to  us  in  our 
struggle.  The  food  alone  which  such  a  person  consumed  was 
acutely  needed,  to  say  nothing  of  the  man  power  which  was 
used  up  in  other  ways  by  his  wasteful  habits  of  consumption. 
Even  those  who  were  usefully  engaged  should  have  understood 
that  luxurious  consumption  on  their  part  was  an  interference 
with  the  plans  and  purposes  of  their  country.  To  consume 
unnecessary  luxuries  is  to  require  an  unnecessary  quantity  of 
man  power  to  produce  for  one,  and  necessarily  reduces  the 
quantity  left  for  fighting  the  nation's  battles  or  producing 
necessary  supplies.  The  same  principle  applies  in  time  of  peace, 
though  the  results  of  wasteful  consumption  are  not  then  so 
dangerous  nor  so  tragic  as  in  time  of  war. 


CHAPTER  XLII 


Difference  between  a  high  and  a  rational  standard  of  living. 
Economists  have  generally  classified  standards  of  living  on 
the  basis  of  their  cost  or  expense.  A  high  standard  of  living 
has  meant  merely  an  expensive  standard ;  a  low  standard  of 
living  has  meant  simply  a  cheap  standard.  Very  little  attention 
has  been  given  to  the  difference  between  a  rational  and  an  irra- 
tional standard.  By  a  rational  standard  of  living  is  meant  one 
which  increases  the  margin  between  one's  production  and  one's 
consumption.  In  the  formula  V  =  P  —  C,  as  given  in  the  preced- 
ing chapter,  the  most  valuable  man  is  the  one  in  whom  P  ex- 
ceeds C  by  the  greatest  margin.  The  purpose  of  the  present 
chapter  is  to  contend  that  the  most  rational  standard  of  living 
is  the  one  which  produces  the  most  valuable  man. 

This  margin  of  difference  between  P  and  C  would  be  in- 
creased, of  course,  either  by  decreasing  C,  by  increasing  P, 
or  by  doing  both  at  the  same  time ;  that  is,  if,  without  reducing 
in  any  degree  his  efficiency  as  a  producer,  a  man  were  to  re- 
duce his  cost  of  living,  he  would  thereby  be  adding  to  his  value 
from  the  standpoint  of  progress.  To  that  extent  he  would  en- 
able the  community  to  produce  more  than  it  consumed.  He 
would  thus  be  a  factor  in  the  accumulation  of  productive  power 
or  of  the  durable  products  of  civilization.  If,  however,  by 
reducing  his  cost  of  living  he  at  the  same  time  reduced  his 
productive  efficiency  in  the  same  proportion,  there  would,  of 
course,  be  no  gain,  and  there  might  be  some  loss  involved.  If, 
on  the  other  hand,  by  spending  more  on  himself,  especially  on 
books  and  other  means  of  education,  on  tools,  or  on  more  nour- 
ishing food,  he  were  able  to  increase  his  productive  efficiency, 
his  increase  in  consumption  would  justify  itself. 

572 


RATIONAL  CONSUMPTION  573 

From  this  point  of  view  the  problem  for  every  individual 
who  desires  for  any  reason  to  add  to  rather  than  subtract  from 
the  strength  and  prosperity  of  his  country  is  to  adopt  that 
standard  of  consumption  which  will  leave  the  largest  margin 
between  production  and  consumption.  From  the  same  point 
of  view  it  would  frequently  be  necessary  that  one  man  should 
spend  more  on  himself  than  another  would  be  justified  in  doing. 
Take,  for  example,  a  great  surgeon,  whose  time  is  exceedingly 
valuable,  not  only  to  himself  but  to  the  community  he  serves. 
He  might  very  properly  keep  an  automobile,  a  chauffeur,  and 
other  timesaving  devices  and  agencies.  He  might  even  keep 
a  valet  to  look  after  his  clothes.  If  these  forms  of  expendi- 
ture would  enable  him  to  give  more  people  the  benefit  of  his 
skill,  it  would  be  to  their  advantage  for  him  to  spend  money  in 
these  ways.  This  applies  to  all  others  whose  time  and  services 
are  valuable  to  the  community.  For  the  same  reason  he  might, 
by  increasing  his  consumption  in  various  ways,  increase  his  pro- 
duction more  than  enough  to  pay  the  added  cost  of  his  living. 
But  an  inexperienced  surgeon,  whose  time  is  not  valuable  to 
the  community, — who,  in  fact,  has  time  to  spare, — could  not 
properly  indulge  in  the  same  timesaving  devices.  For  such  a 
person  to  employ  a  valet  or  even  a  chauffeur  would  be  ridic- 
ulous waste  and  ostentation. 

Buying  trinkets  is  not  good  for  business.  In  opposition  to 
this  point  of  view  there  is  a  popular  theory  to  the  effect  that 
lavish  expenditure  is  somehow  good  for  business.  The  difficulty 
with  this  argument  is  that  it  always  assumes  that  if  the  individ- 
ual is  not  consuming  lavishly,  he  is  not  spending  but  hoarding 
his  money.  It  is  surely  as  good  for  business  and  labor  that 
one  should  spend  money  on  builders  and  architects  as  on 
milliners  and  confectioners.  He  who  consumes  lavishly  spends 
his  money  on  confectioners,  milliners,  and  other  producers  of 
immediate  and  temporary  satisfactions.  He  who  consumes 
rationally  spends  as  much  money  as  he  who  consumes  lavishly, 
but  spends  it  on  things  which  build  and  improve  rather  than 
on  things  which  merely  afford  temporary  gratification.  A  com- 


574  PRINCIPLES  OF  NATIONAL  ECONOMY 

munity  of  lavish  consumers  would,  of  course,  give  actual  em- 
ployment to  those  whose  work  is  to  amuse  and  gratify,  but 
little  employment  to  builders  and  others  producing  for  future 
generations.  A  community  of  rational  consumers,  on  the  other 
hand,  would  give  more  employment  to  those  who  build  for 
future  generations,  and  less  to  those  whose  work  is  to  gratify 
the  interests  of  the  immediate  present.  There  is  no  essential 
difference  in  the  amount  of  money  spent  in  the  two  cases,  pro- 
vided the  two  have  equal  quantities  of  money  to  spend.  The 
difference  is  in  the  way  they  spend  it  and  in  the  direction  they 
give  to  enterprises  and  industry.  The  community  that  spends 
money  in  building  for  future  generations  will  improve  from 
generation  to  generation ;  each  generation  will  inherit  from  the 
preceding  one  a  larger  fund  of  durable  wealth  and  will  add  to 
this  and  bequeath  a  still  larger  fund  to  successive  generations. 

Buying  durable  goods  is  investing  for  the  future.  If  we  were 
to  start  these  two  communities  side  by  side,  with  equal  numbers 
and  equal  natural  resources  but  with  different  habits  of  con- 
sumption, it  would  not  be  many  generations  before  a  marked 
difference  could  be  seen  between  the  two  communities.  The 
community  which  spent  its  income  for  immediate  gratification 
would  fall  behind  the  one  which  spent  a  part  in  building  for  the 
future.  It  would  not  be  many  generations  before  the  latter 
community  would  outstrip  the  former,  and  the  people  from 
the  former  would  be  emigrating  to  find  employment  and  other 
advantages  in  the  latter. 

The  miser  and  the  spendthrift.  Instead  of  placing  the  miser 
and  the  spendthrift  in  opposite  categories,  we  should  really 
put  them  together.  The  miser  is  a  lavish  consumer  in  a  most 
important  sense.  A  consumer  is  defined  as  one  who  uses 
wealth  for  his  immediate  gratification.  In  a  previous  chapter 
consumers'  goods  were  defined  as  goods  used  for  direct  and 
immediate  satisfaction.  Now  a  miser,  instead  of  using  his 
wealth  productively,  keeps  it  for  his  direct  and  personal  en- 
joyment. With  extreme  gratification  he  counts  his  hoard. 
He  loves  to  handle  it,  to  see  it  glitter,  and  to  hear  it  jingle. 


RATIONAL  CONSUMPTION  575 

He  is  in  the  strictest  sense  a  consumer  of  gold.  He  is  very 
much  like  the  spendthrift  in  that  he  gives  up  everything  in 
order  to  get  gold  and  to  enjoy  it  personally,  just  as  the  ordinary 
spendthrift  gives  up  everything  for  personal  enjoyment  of 
other  kinds.  If,  instead  of  hoarding  his  gold  in  his  cellar,  our 
traditional  miser  were  to  use  it  in  gilding  his  house,  no  one 
would  doubt  that  he  was  a  spendthrift.  Whether  he  hoards 
his  gold  in  his  cellar  or  uses  it  for  purposes  of  adornment 
makes  very  little  difference.  The  same  amount  of  gold  is 
withdrawn  from  circulation,  and  much  the  same  effect  on  the 
market  is  produced  in  either  case. 

Both  the  miser  and  the  spendthrift  should  be  contrasted  with 
the  rational  buyer,  or  the  investor  in  durable  goods.  The  true 
investor  buys  goods  of  which  he  himself  will  probably  never 
be  able  to  absorb  the  full  utility.  He  buys  goods  that  will  last 
so  long  that  future  generations  will  get  a  part  of  their  utility. 
Those  future  generations  will  therefore  have  a  better  start  than 
he  did.  If  this  is  kept  up  indefinitely,  generation  after  genera- 
tion, by  all  members  of  the  community,  it  will  be  a  very  pros- 
perous and  progressive  community ;  but  if  each  individual  of 
each  generation  merely  says,  "What  has  posterity  ever  done  for 
me  that  I  should  be  called  upon  to  do  anything  for  posterity  ? 
Let  us  eat,  drink,  and  be  merry !  "  that  will  always  be  a 
backward  community. 

The  case  of  rival  communities.  It  was  suggested  above  that 
if  two  communities  started  side  by  side  with  equal  natural 
advantages  but  with  different  habits  of  spending,  we  might  get 
a  test  of  the  comparative  merits  of  these  habits.  This  may  be 
used  likewise  as  a  means  of  testing,  in  imagination  at  any  rate, 
the  rational  quality  of  a  standard  of  living.  That  standard  of 
living  which  would  enable  a  community  or  nation  to  make  the 
most  rapid  and  permanent  progress  would  have  to  be  com- 
mended. Something  depends,  however,  on  our  definition  of 
progress.  There  may  be  about  as  many  ideals  of  progress  as 
there  are  people  who  have  ideals.  Without  attempting  a 
full  and  complete  definition,  it  would  seem  fairly  safe  to  sug- 


576  PRINCIPLES  OF  NATIONAL  ECONOMY 

gest  that  among  other  things  progress  should  include  general 
improvement  in  comfort,  well-being,  and  satisfaction. 

The  whole  life  of  the  nation  as  well  as  of  the  individual  to  be 
considered.  Whether  this  form  of  progress  is  worth  what  it 
costs  or  not  is  another  question.  The  individual  spendthrift 
doubtless  thinks  that  his  immediate  satisfaction  is  more  impor- 
tant than  his  future  well-being  or  that  of  his  descendants.  He 
therefore  endangers  his  future  well-being  for  the  sake  of  satis- 
faction in  the  present.  To  him  progress  is  not  worth  the  price. 
The  price  is  present  abstinence.  He  would  probably  not  deny 
that  saving  and  economy  would  make  for  progress  (that  is, 
would  make  him  better  off  in  the  future) ;  he  would  merely  say 
that  he  did  not  care  for  progress  so  much  as  for  present  gratifi- 
cation. So  with  a  spendthrift  nation ;  it  might  agree  that 
accumulation  of  wealth  and  improvements  in  comfort  and  well- 
being  would  be  characteristic  of  progress  and  that  thrift  and 
economy  would  contribute  to  that  end,  but  it  might  decide  that 
it  did  not  care  so  much  for  progress  as  for  present  gratification. 
A  nation  feeling  this  way  gets  what  it  prefers.  The  future,  how- 
ever, probably  belongs  to  those  individuals  and  those  nations 
which  possess  more  of  the  time  sense, — to  those  who  are  able 
to  think  of  the  whole  of  life  as  a  unit  rather  than  of  every 
moment  as  sufficient  unto  itself. 

Leaving  out  of  the  discussion  for  the  present  the  question  as 
to  whether  prosperity  is  worth  while  or  not,  but  assuming  that 
it  is  worth  while,  the  test  which  we  have  suggested  would  be  a 
good  one.  What  standard  of  living,  if  adopted  and  followed  per- 
sistently generation  after  generation,  would  increase  the  com- 
fort and  well-being  of  the  community  and  develop  the  power  to 
support  increasing  numbers  of  people  and  support  them  better, 
to  add  to  the  productive  power  of  each  generation,  and  ulti- 
mately to  raise  the  economic,  social,  political,  and  even  military 
strength  of  the  nation  to  the  maximum?  Granting  that  there 
are  other  factors  in  the  problem,  we  still  have  the  right  to  insist 
that  the  standard  of  living  is  one  important  factor.  The  stand- 
ard of  living  which  contributes  most  to  progress  as  we  have 


RATIONAL  CONSUMPTION  577 

defined  it  is  therefore  to  be  commended.  That  standard  of  liv- 
ing will  contribute  most  in  which  the  net  contribution  of  the 
average  person  is  the  highest;  that  is,  where  his  production 
exceeds  his  consumption  by  the  widest  margin. 

Let  us  return  to  the  formula  V  —  P  —  C.  That  is  the  best 
standard  of  living  which  enlarges  the  value  of  the  average 
person  to  the  maximum. 

It  must  begin  to  appear  that  rational  consumption  is  as 
important  a  factor  in  national  prosperity  as  efficient  production. 
The  relation  between  consumption  and  production  is  even 
closer  than  we  have  yet  shown  it  to  be.  In  a  most  important 
sense  useless  consumption  is  a  waste  of  labor,  or  of  productive 
power.  It  requires  labor,  or  productive  power,  to  produce  every- 
thing which  we  consume.  If  our  consumption  is  such  as  to 
enable  us  to  give  back  an  equal  amount  of  productive  power, 
there  is  no  waste ;  but  if  we  consume  in  excess  of  that  which  is 
necessary  to  maintain  our  working  capacity  at  its  maximum 
efficiency,  the  labor  which  produced  the  things  which  we  con- 
sume in  excess  is  wasted  as  truly  as  though  it  were  badly 
directed  or  were  working  with  crude  and  unsuitable  tools. 

Liberal  ideas  as  to  what  is  necessary.  It  is  well,  however,  to 
be  rather  liberal  in  our  ideas  as  to  what  is  necessary  in  order  to 
maintain  a  man's  working  capacity  at  its  maximum.  Consider- 
able recreation  and  relaxation  are  always  recognized  as  neces- 
sary. The  anticipated  enjoyment,  not  only  of  games  and  other 
forms  of  recreation  but  of  objects  of  comfort  and  delight,  is  a 
spur  to  energy.  It  is  not  only  a  spur  to  energy ;  it  is  also  a 
means  of  creating  and  preserving  a  joyful  frame  of  mind,  with- 
out which  sustained  effort  is  impossible,  and  without  which  it  is 
frequently  asserted  that  no  really  fine  work  of  any  kind  is 
ever  done. 

Joy  in  work.  Looking  forward  to  a  holiday  or  a  vacation  has 
sustained  many  a  laborer  through  weeks  and  months  of  study 
and  toil.  The  desire  to  possess  a  bicycle  or  an  automobile  has 
galvanized  many  an  otherwise  indolent  boy  into  strenuous  pro- 
ductivity. The  pleasure  of  giving  useless  presents  to  their  chil- 


578  PRINCIPLES  OF  NATIONAL  ECONOMY 

dren  at  Christmas  time  has  lightened  the  toil  of  many  a  father 
and  mother  through  many  a  hard  winter.  In  our  attempts  to 
define  a  rational  standard  of  living  we  must  not  overlook  a 
multitude  of  things  which  people  want  and  want  intensely  with- 
out being  able  to  give  any  good  reason  why  they  want  them. 
Women  can  no  more  give  a  reason  why  they  like  babies  and 
finery  than  a  fox  terrier  can  give  a  reason  why  he  likes  to  chase 
cats.  There  is  no  more  certain  way  of  spoiling  a  boy  than  by 
compelling  him  to  give  a  reason  for  everything  which  he  wants 
and  refusing  to  allow  him  to  have  it  unless  his  reason  is  satis- 
factory to  older  people.  It  would  be  equally  unwise  to  try  the 
same  plan  with  grown-ups.  We  must  be  rather  careful,  there- 
fore, in  defining  a  rational  standard  of  living,  not  to  eliminate 
many  things  which  no  one  is  able  to  give  a  very  good  rea- 
son for  desiring,  but  which,  nevertheless,  are  desired  with  an 
intensity  which  cannot  always  be  expressed. 

Tools  as  consumers'  goods.  The  world  has  undoubtedly  lost 
much,  in  productive  efficiency  as  well  as  in  the  joy  of  living, 
through  its  failure  to  appreciate  the  possibilities  in  the  direc- 
tion of  turning  tools  and  other  producers'  goods  into  consumers' 
goods.  That  one  must  have  good  tools  to  do  good  work  has 
long  been  recognized,  but  we  have  scarcely  begun  to  realize  the 
full  meaning  of  the  term  "good  tools."  It  is  not  only  necessary 
that  they  be  capable  of  doing  their  purely  mechanical  work ; 
it  is  also  essential  that  they  please  the  mind  of  the  worker.  They 
must  be  pleasing  to  look  upon  as  well  as  agreeable  to  the  hand. 

The  purpose  of  a  tool  is  to  bridge  the  gap  between  the  worker 
and  the  object  upon  which  he  is  working, —  to  enable  him  to 
transfer  to  the  object  the  idea  or  plan  which  he  has  in  mind. 
It  must  therefore  fit  the  mind  of  the  worker  as  well  as  his 
hand  and  his  arm. 

The  importance  of  having  tools  which  help  to  keep  the  worker 
in  an  agreeable  frame  of  mind  is  not  so  much  in  the  fact  that 
he  can  do  more  or  better  work  in  a  given  minute  or  a  given 
hour,  though  there  is  something  in  that ;  the  chief  importance 


RATIONAL  CONSUMPTION  579 

lies  in  the  fact  that  he  can  keep  at  it  for  more  minutes,  more 
hours,  more  days,  and  more  years. 

Coaxing  ourselves  to  work.  Some  rare  geniuses  are  able  to 
work  regularly  and  all  the  time,  "taking  infinite  pains"  and 
apparently  never  tiring.  Most  of  us,  however,  are  desultory 
creatures  who  have  to  coax  ourselves  to  work  steadily.  It  is 
easier  to  coax  ourselves  to  work  properly  if  our  tools  are  such 
as  we  delight  to  handle  and  our  workshop  is  a  place  where  we 
delight  to  be. 

The  writer  remembers  a  venerable  farmer  who  seemed  to  be 
the  very  embodiment  of  the  spirit  of  work.  The  habits  of  a  life- 
time had  got  into  his  very  bone  and  muscle.  Work  seemed  to 
be  his  chief  pleasure  and  idleness  his  chief  pain.  Yet  he  con- 
fided to  the  writer  that  he  feared  he  lacked  the  moral  character 
which  was  necessary  to  set  a  gatepost  properly.  He  knew  that 
it  ought  to  be  set  four  feet  deep, — that  if  it  were  set  less  deep 
than  that,  the  gate  would  sooner  or  later  begin  to  sag  and  give 
trouble.  Yet  when  he  was  actually  digging  the  hole  he  found 
his  courage  and  his  determination  gradually  weakening.  When 
it  was  three  feet  deep  it  "looked  deep  enough,"  and  unless  he 
rallied  all  his  moral  force  he  would  stop  somewhat  short  of  the 
necessary  four  feet.  As  another  means  of  supporting  his  char- 
acter and  encouraging  himself  to  do  what  he  knew  he  ought  to 
do,  he  never  undertook  to  dig  a  post  hole  unless  he  had  all  his 
tools  in  the  best  possible  shape.  It  was  harder  to  persevere  with 
poor  tools  than  with  good  tools.  A  new  tool  in  which  one  takes 
some  pride  is  a  great  help  in  such  times  of  moral  strain. 

Aside  from  their  effect  upon  the  quantity  and  quality  of  the 
work  which  a  person  can  do,  handsome  tools  contribute  their 
share  to  the  sheer  joy  of  living.  Those  people  who  are  not 
obliged  to  work  have  the  same  need  as  others  for  pleasing 
effects.  Not  having  any  use  for  tools  or  other  objects  of  utility, 
they  take  to  collecting  useless  objects,  somewhat  after  the 
fashion  of  the  bower  bird.  That  bird,  it  will  be  remembered, 
gathers  bits  of  glass,  colored  string,  broken  china,  bright  peb- 


580  PRINCIPLES  OF  NATIONAL  ECONOMY 

bles,  and  spreads  them  before  her  nest,  for  no  purpose,  appar- 
ently, except  the  pleasure  of  looking  at  them.  Now  tools  may 
be  just  as  beautiful  as  the  greater  number  of  those  useless 
objects  which  people  of  leisure  and  bower  birds  collect  for 
their  own  delectation.  Those  who  work  spend  a  large  portion 
of  their  time  with  their  tools  and  in  their  shops,  more  than  they 
are  likely  to  spend  anywhere  else  except  in  their  own  homes. 
Next  to  the  adornment  of  their  homes,  the  adornment  and 
beautification  of  their  working-places  must  furnish  them  the 
pleasure  of  living. 

Pride  in  work.  The  spirit  which  regards  work  as  a  more  or 
less  repulsive  necessity — which  tries  to  cover  up  in  many  ways 
the  evidences  of  work — is  probably  responsible  for  a  large  part 
of  the  neglect  which  we  have  shown  in  the  case  of  our  working- 
places.  Naturally  enough  a  person  who  regards  work  merely 
as  a  disagreeable  necessity — something  to  be  ashamed  of  and 
avoided  on  every  possible  pretext — is  not  likely  to  spend  very 
much  money  on  the  polishing  or  adornment  of  his  tools  or  the 
beautification  of  his  working-place. 

No  rural  neighborhood,  for  example,  is  quite  so  desolate  as 
that  from  which  people  retire  as  soon  as  they  have  accumu- 
lated enough  to  enable  them  to  live  in  town.  Farmers  who 
retire  as  soon  as  they  can  possibly  afford  to  do  so  are  not  likely 
to  spend  much  money  in  adorning  their  farmhouses  or  in  mak- 
ing the  neighborhood  attractive.  It  is  only  where  you  find 
farmers  who  are  glad  that  they  are  farmers — who  expect  to 
remain  farmers  and  whose  children  look  forward  to  the  same 
career — that  you  find  the  farms,  the  homes,  and  the  community 
adorned  and  embellished  with  the  evidences  of  civilization. 

Absentee  ownership.  No  town  or  section  of  a  town  is  gener- 
ally quite  so  unattractive  as  the  place  where  the  people  work. 
It  has  not  occurred  to  many  of  the  owners  of  these  working- 
places  that  the  people  really  live  there  a  good  portion  of  their 
lives,  and  that  if  they  cannot  get  a  part  of  their  joy  of  living 
there  they  will  miss  a  good  deal  of  it.  No  doubt  this  is  due 
partly  to  the  fact  that  the  owners  themselves  live  elsewhere.  In 


RATIONAL  CONSUMPTION  581 

this  respect  a  factory  district  resembles  a  farming  district  whose 
land  is  owned  by  absentee  landlords.  The  surplus  which  the 
land  affords  is  all  spent  somewhere  else, — where  the  owner 
lives, — in  adorning  and  embellishing  his  home ;  there  is  none 
left  to  adorn  and  embellish  the  countryside.  Similarly,  the 
surplus  which  the  factory  yields  is  spent  somewhere  else,  usu- 
ally as  far  from  the  factory  as  the  owner  and  his  family  can  get. 

If  it  were  not  for  the  fact,  referred  to  above,  that  we  have 
inherited  certain  aristocratic  traditions  (or  else  that  we  try 
to  ape  those  who  have)  and  are  rather  anxious  to  get  away 
from  the  sources  of  our  incomes,  we  might  find  it  possible,  in 
some  cases  at  least,  to  live  near  our  places  of  business.  If  we 
all  did  so  we  should  spend  our  money  there  and  should  also,  if 
we  could  afford  it,  beautify  those  surroundings  as  we  now 
beautify  the  suburban  districts  where  we  live. 

What  is  drudgery  ?  Even  inside  of  our  homes  or  dwelling- 
places  the  same  tendencies  show  themselves.  When  the  people 
who  can  and  do  appreciate  art  and  beauty  all  keep  servants  to 
do  the  housework,  such  places  as  the  kitchen,  the  laundry,  and 
the  scullery,  where  the  necessary  work  of  the  household  is  done, 
are  unattractive  places.  Adornment  is  reserved  for  those  parts 
of  the  house  where  the  family  live.  Even  those,  people  who  love 
beautiful  things  and,  at  the  same  time,  have  to  do  their  own 
household  work,  frequently  imitate  the  same  customs.  It  is 
unnecessary  to  remark  that  their  work  seems  like  drudgery 
because  it  has  to  be  done  under  unattractive  conditions.  There 
are,  however,  many  fine  exceptions  to  this  general  rule,  as  in 
the  case  of  the  old-fashioned  rural  kitchen.  This  noble  institu- 
tion could  never  have  developed  except  among  people  of  intelli- 
gence and  taste  who  cheerfully  accepted  the  fact  that  work  was 
a  necessity  and  tried  to  make  the  most  of  it.  There  was  no 
pretense  that  living  and  working  could  be  divorced  and  no 
desire  to  keep  them  apart.  There  was  the  frank  recognition 
of  the  fact  that  life  must  consist  very  largely  of  work,  that  the 
working-place  and  the  living-place  could  not  be  separated,  and 
that  the  joy  of  life  must  be  derived  largely  from  the  working- 


582  PRINCIPLES  OF  NATIONAL  ECONOMY 

place  during  the  working-time.  Having  once  accepted  the  fact 
that  work  is  a  necessity,  and  having  developed  customs  and 
institutions  in  harmony  with  it,  there  is  no  further  mystery 
connected  with  the  fact  that  such  people  took  their  work  cheer- 
fully and  that  it  never  occurred  to  them  that  it  was  drudgery. 

Unfashionableness  of  work.  It  is  astonishing  how  much  of 
the  fashion  of  the  world  is  due  to  the  desire  to  avoid  the  ap- 
pearance of  having  to  work,  or  even  to  advertise  the  fact  that 
one  does  not  have  to  work.  In  ancient  times  certain  Chinese 
magnates  used  to  allow  the  finger  nails  to  grow  to  extraordinary 
lengths  as  a  visible  sign  that  they  did  not  have  to  work.  The 
binding  of  the  feet  of  the  girls  is  said  to  have  had  the  same 
origin.  The  train,  which  only  lately  was  a  fashionable  ne- 
cessity for  every  lady  in  Christendom,  answered  much  the 
same  purpose. 

Seeing  that  we  have  been  so  anxious  either  to  avoid  work  or 
at  least  to  avoid  the  appearance  of  having  to  work,  it  is  not 
strange  that  we  have  done  very  little  to  make  our  work  agree- 
able. The  opposite  tendency  shows  itself  once  in  a  while,  how- 
ever, as  in  the  case  of  those  New  England  shoemakers  of  an 
earlier  day  who  cooperated  to  hire  readers  to  read  to  them  while 
they  plied  their  trade.  Such  people  cannot  be  kept  down. 
They  built  up  a  great  shoemaking  industry  in  New  England. 
One  finds  good  workmen  who  delight  in  nice  tools, — tools  with 
which  it  is  a  pleasure  to  work, — and  who,  if  they  have  an 
opportunity,  adorn  their  shops  with  flowers.  A  good  farmer 
usually  likes  to  work  with  a  handsome  team,  well  groomed 
and  well  harnessed.  The  team  is  to  him  both  a  consumers' 
good  and  producers'  good.  There  is  not  much  doubt  that  such 
a  farmer  works  more  cheerfully  and  more  steadily  and  finds 
life  more  enjoyable  than  if  he  tried  to  get  along  with  an  ill- 
matched,  unattractive  team.  It  is  reasonable  to  suppose  that 
we  should  all  do  better  and  more  persistent  work  and  get  more 
enjoyment  out  of  life  if  we  took  some  pains  to  make  the  con- 
ditions of  our  work  attractive.  If  this  is  so,  it  is  a  matter  of 
great  economic  importance  and  one  which  will  contribute  to 


RATIONAL  CONSUMPTION  583 

the  prosperity,  strength,  and  greatness  of  the  nation,  and  even 
more  to  the  enjoyment  of  the  people.  Expenditure  for  such 
things  would  form  a  part  of  a  rational  system  of  consumption. 
But  it  is  important  that  all  such  enjoyable  consumption  should 
be  regarded  in  its  true  relation  to  the  problems  of  the  national 
life  upon  which  our  individual  lives  depend  in  the  long  run.  To 
forget  its  relation  to  the  joy  of  work  and  to  think  of  it  as 
an  end  in  itself,  unrelated  to  the  larger  problems  of  life,  is 
to  diminish  our  own  value  to  the  nation  and,  to  that  extent  at 
least,  endanger  the  position  of  our  posterity. 


CHAPTER  XLIII 
LUXURY 

Different  classes  of  consumers'  goods.  Consumers' goods  have 
been  divided  into  four  classes,  according  to  the  kind  of  desires 
which  they  are  designed  to  satisfy.  They  are  necessaries,  com- 
forts, decencies,  and  luxuries.  This,  however,  is  at  best  only  a 
rough  classification.  It  may  seem  fairly  easy  to  distinguish 
between  necessaries  and  comforts,  and  there  are  doubtless  many 
cases  where  goods  are  easily  classified  ;  but  there  are  also  many 
line  cases  where  it  is  difficult  to  determine  whether  the  good 
in  question  is  a  necessary  or  a  comfort,  or  even  a  decency. 
Another  difficulty  which  tends  to  obscure  the  distinction  is 
found  in  the  fact  that  no  one,  however  poor,  confines  himself 
to  necessaries.  Part  of  his  expenditure  will  go  for  comforts, 
part  for  decencies,  and  part  even  for  luxuries.  Again,  no  one, 
however  rich,  can  avoid  the  buying  of  necessaries  and  comforts. 

Necessaries.  In  a  general  way  we  may  define  necessaries  as 
all  goods  which  are  required  for  the  maintenance  of  physical 
health  and  strength,  not  only  of  the  mature  man  but  also  of  his 
family  and  even  of  his  young  children.  In  discussing  what  used 
to  be  called  the  iron  law  of  wages,  it  was  said  that  the  natural 
wages  of  labor  are  made  up  of  those  things  which  are  necessary 
in  order  that  the  laborer  may  maintain  his  health  and  strength 
and  reproduce  his  kind  so  as  to  maintain  the  supply  of  labor 
without  increase  or  diminution.  Aside  from  the  unwarranted 
use  of  the  word  " natural"  as  applied  to  this  rate  of  wages,  it 
would  be  impossible  to  say  that  such  wages  would  consist  en- 
tirely of  necessaries.  It  is  quite  possible  that  the  laborers  might 
demand  luxuries  and  forego  the  gratification  of  their  domestic 
instinct  unless  they  could  get  them.  In  that  case  wages  would 


LUXURY  585 

have  to  be  high  enough  to  provide  the  laborers  with  these 
luxuries ;  otherwise  they  would  not  marry  and  reproduce  their 
kind  with  sufficient  rapidity  to  keep  the  supply  of  labor  intact. 
It  would,  in  that  state  of  society,  be  necessary  to  pay  such 
wages  as  these,  but  it  could  hardly  be  said  that  everything 
which  these  well-to-do  laborers  consumed  could  be  classified  as 
necessaries  of  life.  In  short,  wages  which  will  enable  the 
laborer  to  enjoy  comforts,  decencies,  and  luxuries,  as  well  as 
necessaries,  may  have  to  be  paid  in  order  to  keep  up  the 
supply  of  labor. 

Comforts.  Of  these  three  classes  of  goods,  comforts  are  the 
most  difficult  to  define.  While  not  absolutely  necessary  for  the 
maintenance  of  health  and  strength,  still  they  can  hardly  be 
dispensed  with  in  any  society  where  life  is  really  worth  living. 
A  young  and  vigorous  person  might,  by  running  to  and  from 
his  work  in  cold  weather,  dispense  with  an  overcoat.  From  his 
point  of  view  an  overcoat  could  hardly  be  called  a  necessary, 
and  yet  it  would  be  a  great  comfort.  Cushions  or  upholstered 
furniture,  spring  mattresses,  etc.,  can  hardly  be  called  absolute 
necessaries,  and  yet  they  would  be  considered  almost  indispen- 
sable by  the  average  family. 

Decencies.  The  dividing  line  between  comforts  and  decencies 
is  likewise  obscure.  By  decencies  we  mean  those  articles  of 
consumption  which  the  habits  or  customs  of  one's  neighbor- 
hood or  one's  class  prescribe  and  without  which  the  individual 
or  the  family  would  feel  that  it  could  scarcely  maintain  its  posi- 
tion of  respectability.  In  a  community  where  military  tradi- 
tions are  strong  and  society  tends  to  be  stratified,  a  military 
officer  could  almost  lose  caste  if  he  condescended  to  ride  on  a 
street  car.  In  such  a  community  a  private  carriage  would  seem 
almost  to  be  a  necessary,  though  according  to  our  definition  we 
should  call  it  a  decency.  Anything  which  an  individual  member 
of  any  class,  occupation,  or  profession  would  feel  ashamed  to 
be  without  would  come  under  our  definition.  Adam  Smith1 
included  both  decencies  and  comforts  under  necessaries  and 

1The  Wealth  of  Nations,  pp.  466-467.    The  Clarendon  Press,  Oxford,  1880. 


586  PRINCIPLES  OF  NATIONAL  ECONOMY 

gives  a  very  clear  description  of  the  difference,  as  it  appeared  to 
him  in  his  day,  between  necessaries  and  luxuries,  the  two  classes 
into  which  he  divided  all  consumable  goods. 

By  necessaries  I  understand,  not  only  the  commodities  which  are 
indispensably  necessary  for  the  support  of  life,  but  whatever  the 
custom  of  the  country  renders  it  Indecent  for  creditable  people,  even 
of  the  lowest  order,  to  be  without.  A  linen  shirt,  for  example,  is, 
strictly  speaking,  not  a  necessary  of  life.  The  Greeks  and  Romans 
lived,  I  suppose,  very  comfortably,  though  they  had  no  linen.  But  in 
the  present  times,  through  the  greater  part  of  Europe,  a  creditable 
day-labourer  would  be  ashamed  to  appear  in  public  without  a  linen 
shirt,  the  want  of  which  would  be  supposed  to  denote  that  disgraceful 
degree  of  poverty  which,  it  is  presumed,  nobody  can  well  fall  into 
without  extreme  bad  conduct.  Custom,  in  the  same  manner,  has 
rendered  leather  shoes  a  necessary  of  life  in  England.  The  poorest 
creditable  person  of  either  sex  would  be  ashamed  to  appear  in  public 
without  them.  In  Scotland,  custom  has  rendered  them  a  necessary 
of  life  to  the  lowest  order  of  men,  but  not  to  the  same  order  of 
women,  who  may,  without  any  discredit,  walk  about  barefooted. 
Under  necessaries,  therefore,  I  comprehend,  not  only  those  things 
which  nature,  but  those  things  which  the  established  rules  of  decency 
have  rendered  necessary  to  the  lowest  rank  of  people.  All  other 
things  I  call  luxuries,  without  meaning  by  this  appellation  to  throw 
the  smallest  degree  of  reproach  upon  the  temperate  use  of  them. 
Beer  and  ale,  for  example,  in  Great  Britain,  and  wine,  even  in  the 
wine  countries,  I  call  luxuries.  A  man  of  any  rank  may,  without  any 
reproach,  abstain  totally  from  tasting  such  liquors.  Nature  does  not 
render  them  necessary  for  the  support  of  life ;  and  custom  nowhere 
renders  it  indecent  to  live  without  them. 

Marshall1  divides  consumers'  goods  into  necessaries,  comforts, 
and  luxuries,  making  no  special  class  to  be  called  decencies. 

This  brings  us  to  consider  the  term  "necessaries."  It  is  common 
to  divide  wealth  into  necessaries,  comforts,  and  luxuries ;  the  first 
class  including  all  things  required  to  meet  wants  which  must  be  satis- 
fied, while  the  latter  consists  of  things  that  meet  wants  of  a  less 

1Alfred  Marshall,  Principles  of  Economics,  pp.  67-69.  Macmilhn  £  Co., 
Limited,  London  (fifth  edition),  1907. 


LUXURY  587 

» 

urgent  character.  But  here  again  there  is  a  troublesome  ambiguity. 
When  we  say  that  a  want  must  be  satisfied,  what  are  the  consequences 
which  we  have  in  view  if  it  is  not  satisfied  ?  Do  they  include  death  ? 
Or  do  they  extend  only  to  the  loss  of  strength  and  vigour  ?  In  other 
words,  are  necessaries  the  things  which  are  necessary  for  life  or  those 
which  are  necessary  for  efficiency?  .  .  . 

It  may  be  true  that  the  wages  of  any  industrial  class  might  have 
sufficed  to  maintain  a  higher  efficiency,  if  they  had  been  spent  with 
perfect  wisdom.  But  every  estimate  of  necessaries  must  be  relative 
to  a  given  place  and  time  ;  and  unless  there  be  a  special  interpretation 
clause  to  the  contrary,  it  may  be  assumed  that  the  wages  will  be 
spent  with  just  that  amount  of  wisdom,  forethought,  and  unselfishness 
which  prevails  in  fact  among  the  industrial  class  under  discussion. 
With  this  understanding  we  may  say  that  the  income  of  any  class  in 
the  ranks  of  industry  is  below  its  necessary  level,  when  any  increase 
in  their  income  would  in  the  course  of  time  produce  a  more  than 
proportionate  increase  in  their  efficiency.  Consumption  may  be 
economized  by  a  change  of  habits,  but  any  stinting  of  necessaries 
is  wasteful. 

Luxuries.  Where  comforts  or  even  luxuries  have  entered 
into  the  laborer's  standard  of  living,  it  would  undoubtedly  be 
true,  as  Marshall  suggests,  that  any  forcible  reduction  of  wages 
would  result  in  less  efficiency  on  the  part  of  the  laborers.  From 
the  standpoint  of  either  the  lawmaker  or  the  employer,  there- 
fore, all  those  things  which  the  customs  of  the  time  and  country 
give  to  the  laborer  must  be  considered  as  necessaries.  To  with- 
hold a  portion  of  the  laborer's  wages  would  not  result  in  the 
mere  cutting  out  of  a  few  luxuries  from  his  consumption.  He 
would  be  quite  as  likely  to  cut  down  his  consumption  of  physi- 
cal necessaries  as  of  those  things  which,  from  an  absolute  point 
of  view,  could  be  called  decencies  or  luxuries.  It  is  a  well- 
known  fact  that  high-spirited  people,  with  social  standards 
and  traditions  to  maintain,  will,  if  they  find  themselves  in 
reduced  circumstances,  deprive  themselves  of  absolute  physical 
necessaries  of  life  in  order  to  keep  up  appearances.  This,  of 
course,  is  certain  to  reduce  their  efficiency. 


588  PRINCIPLES  OF  NATIONAL  ECONOMY 

While  this  is  a  final  consideration  so  far  as  the  employer  or 
the  lawmaker  is  concerned,  it  does  not  alter  the  fact  that  if 
these  people  could  be  appealed  to  on  moral  or  other  grounds 
to  rationalize  their  habits  of  consumption,  they  would  be  much 
better  off.  If  they  would  reduce  their  consumption  of  luxuries 
and  increase  their  consumption  of  the  necessaries  of  life,  not 
only  their  working  efficiency  but  their  general  economic  well- 
being  would  be  improved.  "  Where  fore  will  ye  spend  your 
money  for  that  which  is  not  bread?"  demanded  the  prophet. 
He  was  making  his  appeal,  however,  directly  to  the  individual 
and  not  proposing  any  control  of  consumption  by  law. 

Luxuries  have  very  much  the  same  meaning  today  as  that 
which  Adam  Smith  gave  to  them.  They  are  articles  of  con- 
sumption which  are  not  demanded  either  by  the  physical  health 
and  strength  of  the  people  or  by  the  rules  of  society,  but  are 
wholly  matters  of  individual  indulgence.  The  dividing  line, 
however,  between  decencies  and  luxuries  is  still  very  obscure. 
If  a  person  belongs  to  a  small  group  of  spendthrifts,  it  may  be 
claimed  that  the  rules  of  his  social  group  compel  him  to  spend 
money  lavishly  on  things  which  others  would  regard  as  pure 
luxuries.  He  may  therefore  claim  that  these  are  only  decencies 
because  they  are  prescribed  by  the  rules  of  his  group  or  class. 
Instead  of  accepting  the  verdict  of  any  special  class  or  set, 
it  would  seem  better  to  confine  our  idea  of  decencies  to  those 
things  which  are  prescribed  by  the  almost  universal  consensus 
of  opinion  of  the  time  and  place.  Thus,  in  America,  for  example, 
it  would  be  almost  universally  thought  to  be  indecent  for  men 
and  women  to  appear  in  public  places,  even  in  warm  weather, 
without  shoes,  though  there  are  certain  isolated  communities 
where  this  rule  would  not  prevail.  Before  the  advent  of  the 
waist  shirt  it  was  generally  regarded  as  improper  for  a  man  to 
appear  at  any  public  place,  especially  indoors,  without  a  coat. 
That  every  woman  shall  possess  certain  articles  of  finery  is  a 
rule  even  among  the  poorest  of  people.  It  will  be  better,  there- 
fore, if  we  restrict  the  definition  of  decencies  to  those  things 


LUXURY  589 

which  society  in  general,  rather  than  some  special  clique  or 
coterie,  prescribes  as  necessary. 

Stimulating  effect  of  luxury.  Economists  have  been  some- 
what divided  on  the  question  as  to  whether  a  luxury  is  always 
to  be  condemned  or  not.  McCulloch1  states  that  any  gratifica- 
tion, however  trivial,  is  necessary  if  an  individual  is  stimulated 
to  work  in  order  to  attain  it.  John  Stuart  Mill2  says,  "To 
civilize  a  savage,  he  must  be  inspired  with  new  wants  and  de- 
sires, even  if  not  of  a  very  elevated  kind,  provided  that  their 
gratification  can  be  a  motive  to  steady  and  regular  bodily  and 
mental  exertion."  It  is  a  well-known  fact  that  in  certain  low 
states  of  civilization  the  laborer  or  the  peon  is  content  with  so 
few  articles  of  consumption  that  he  will  not  work  efficiently 
or  steadily.  If  by  working  three  days  in  a  week  he  can  earn 
wages  enough  to  support  him,  in  the  style  to  which  he  is  accus- 
tomed, for  seven  days,  he  will  work  only  three  days  in  the 
week.  It  has  been  generally  recognized  that  the  only  cure  for 
this  difficulty  is  to  raise  his  standard  of  living  and  increase  his 
wants,  so  that  he  will  have  a  motive  for  regular  and  steady  work. 
Many  interesting  stories  are  told  of  the  devices  by  means  of 
which  the  laborer  is  induced  to  work  or  by  which  his  wife 
is  induced  to  demand  more  wages  of  him  in  order  that  she  may 
provide  herself  with  finery. 

We  need  not  go  to  backward  countries,  however,  to  find 
examples  which  illustrate  precisely  the  same  principle.  There 
are  men  among  us  who  reduce  the  number  of  working-hours 
per  day  for  much  the  same  reason.  Finding  that  they  can 
earn  enough  in  four  hours  to  support  them  for  twenty-four, 
they  choose  to  work  only  four  hours  a  day ;  that  is,  they  go 
to  their  offices  at  about  ten  o'clock  in  the  morning  and  stay 
until  about  two,  and  spend  the  rest  of  the  day  at  the  club  or 
the  golf  course.  There  are  still  others  who  find  that  they  can 
earn  enough  in  twenty  years  to  support  them  for  the  whole  of 

ij.  R.  McCulloch,  The  Principles  of  Political  Economy.    Edinburgh,  1825. 
2  Principles  of  Political  Economy,  Bk.  I,  chap,  vii,  §  3. 


590  PRINCIPLES  OF  NATIONAL  ECONOMY 

their  lives.  They  therefore  retire  from  business  long  before 
their  physical  and  mental  capacity  has  begun  to  decline,  and 
spend  the  rest  of  their  time  in  pleasant  pursuits. 

Economically  speaking,  however,  all  these  men,  from  the 
peon  up,  are  merely  choosing  between  different  kinds  of  luxury. 
To  the  peon  leisure,  sport,  amusement,  and  even  rest  are 
luxuries  in  which  he  delights.  If  his  desire  for  this  sort  of 
luxury  is  stronger  than  his  desire  for  other  kinds,  he  will  choose 
this  kind.  The  same  is  true  of  the  man  who  cuts  down  his 
working-day  or  his  working-years.  To  him  leisure,  sport,  and 
rest  are  luxuries.  If  he  cares  more  for  these  than  for  such 
alternative  luxuries  of  other  kinds  as  he  could  secure  by  work- 
ing longer,  he  will  of  course  choose  these. 

Material  and  immaterial  luxuries.  It  is  true  that  by  choosing 
material  luxuries,  rather  than  the  immaterial  satisfaction  of 
leisure  and  rest,  the  quantity  of  material  goods  which  are  pro- 
duced and  put  on  the  market  is  increased.  The  statistics  of 
wealth  are  expanded.  The  census-taker  and  the  tax  assessor 
find  more  tangible  articles  of  wealth  in  such  a  community  than 
they  would  find  in  one  which  preferred  to  take  its  luxuries 
in  the  form  of  leisure.  Doubtless  all  of  us  who  are  members 
of  a  strenuous  race,  to  whom  leisure  does  not  seem  so  very 
desirable,  and  also  of  a  race  which  might  be  malignly  charac- 
terized as  greedy  or  gluttonous,  having  powerful  desires  for 
material  luxuries,  think  that  we  have  made  much  the  better 
choice.  We  are  therefore  much  inclined  to  despise  the  race 
which  chooses  otherwise.  There  is  such  a  thing  as  a  pot  calling 
a  kettle  black. 

A  storehouse  of  labor.  There  is  another  argument,  however, 
which  goes  back  at  least  as  far  as  David  Hume,  to  the  effect 
that  luxuries  must  be  regarded  as  a  storehouse  of  labor  which 
in  the  exigencies  of  the  state  may  be  turned  to  the  public 
service.  This  may  mean  merely  that  a  community  which  is 
expending  a  large  proportion  of  its  energy  in  the  production  of 
luxuries  may,  in  times  of  great  crisis,  turn  that  surplus  energy 
into  the  work  of  meeting  the  crisis.  In  time  of  war,  for  in- 


LUXURY  591 

stance,  the  consumption  of  luxuries  may  be  cut  down,  and  the 
productive  energy,  which  had  been  used  in  the  production  of 
luxuries,  may  now  be  used  in  the  prosecution  of  the  war  or  in 
the  manufacture  of  munitions  and  war  equipment.  This  is 
undoubtedly  a  sound  argument  so  far  as  it  goes. 

In  order  to  put  several  million  men  of  working-age  into  the 
army  and  navy,  and  more  millions  into  the  munition  factories 
and  navy  yards,  and  others  into  the  mines  to  produce  the  raw 
materials,  and  still  others  onto  the  farms  in  order  to  increase 
the  food  production,  it  is  absolutely  certain  that  extra  labor 
must  be  secured  from  some  source.  It  is  fairly  obvious  that 
there  are  only  two  sources  from  which  laborers  can  be  drawn. 
Those  who  are  not  working  may  be  put  to  work,  and  those  who 
are  doing  unnecessary  kinds  of  work  may  be  put  into  the  neces- 
sary industries.  There  is  no  other  possibility.  The  nation 
must  therefore  look  about  and  see  what  can  be  done  in  these 
two  directions. 

Most  men  of  working-age  are  generally,  in  our  civilization, 
at  work  doing  something  which  is  necessary,  convenient,  or 
pleasing.  A  few  more  women  than  men  are  virtually  idle, 
though  they  all  probably  manage  to  keep  busy  at  something 
or  other.  In  time  of  national  crisis  some  of  them  may  work 
in  munition  factories  or  take  places  in  the  ordinary  factories, 
shops,  and  stores,  displacing  men  already  employed.  Those 
who  are  displaced  may  then  enlist  or  go  into  munition  factories. 
A  much  better  opportunity  is  offered  in  their  own  homes. 
Every  woman  who  keeps  one  or  more  servants  and  who  is  able 
to  do  anything  either  inside  or  outside  the  home  may  do  her 
own  housework  and  discharge  her  servants.  They  will  then  be 
available  for  the  industries  whose  expansion  is  made  necessary 
by  the  war.  Those  who  are  situated  where  they  can  have  a 
sizable  garden  may  work  advantageously  at  gardening,  but  it 
would  be  of  no  great  advantage  unless  they  took  their  work 
seriously  and  did  not  waste  their  time  on  a  few  struggling 
plants  ;  that  is,  unless  they  did  an  appreciable  fraction  of  what 
is  known  as  a  man's  work. 


592  PRINCIPLES  OF  NATIONAL  ECONOMY 

Reducing  consumption  in  times  of  national  crisis.  A  much 
greater  opportunity  lies  in  the  closing  or  cutting  down  of  all 
unnecessary  industries  and  occupations.  If  every  luxury- 
producing  industry  were  closed  down,  a  vast  quantity  of  labor 
would  be  released.  It  would  then  be  available  either  for  mili- 
tary purposes  or  for  the  production  of  the  necessaries  of  life. 
Our  golf  courses,  baseball  fields,  and  tennis  courts  could  be 
transformed  into  farms  and  gardens.  This  would  add  a  good 
many  acres  to  the  productive  land,  and,  what  is  vastly  more 
important,  the  players  as  well  as  the  spectators  could  be  used 
in  productive  work.  These  suggestions  are  enough  to  indicate 
that  considerable  changes  in  the  daily  habits  of  the  people  may 
be  necessary  whenever  a  great  national  crisis  is  to  be  met. 

These  changes  in  habits  may  profitably  go  much  farther. 
The  people  may  economize  greatly  in  their  consumption.  It  is 
amusing  to  hear  some  people  talk  about  the  waste  in  American 
life.  You  would  think  that  the  great  American  garbage  pail 
was  a  veritable  gold  mine  if  it  could  only  be  profitably  worked. 
Doubtless  there  is  some  waste  there,  and  it  will  bear  looking 
into ;  but  if  we  would  consume  more  food  and  fewer  condi- 
ments, relishes,  and  delicacies,  whose  real  function  is  to  make 
the  food  palatable,  we  should  reduce  the  cost  of  food  about  one 
half.  Starch,  in  the  form  of  grain,  potatoes,  or  coarse  vege- 
tables, is  our  principal  food.  To  this  must  be  added  a  very 
moderate  amount  of  protein,  fats,  and  sugar.  These,  however, 
may  also  be  made  to  serve  the  purpose  of  making  the  basic 
starchy  food  more  palatable.  Fruits  and  the  finer  vegetables 
and  salads  can  be  made  to  serve  mainly  as  relishes.  Instead, 
many  of  us  make  our  meals  principally  of  things  which  should 
serve  as  appetizers,  relishes,  and  delicacies,  using  starchy  food 
only  as  a  means  of  diluting  them.  It  is  this  habit,  rather  than 
our  garbage  pails,  with  which  the  French  people,  who  are  so 
much  wiser  in  matters  of  food  than  we  are,  find  most  fault. 
As  to  clothing,  if  the  people  patch  and  darn  it  and  make  it  last 
longer,  the  textile  and  clothing  trades  will  then  have  time  to 
produce  army  supplies.  Without  these  changes  of  habit  and 


LUXURY  593 

many  others  of  the  same  kind,  let  it  be  remembered,  it  is  im- 
possible to  recruit  a  great  army  and  navy  and  at  the  same  time 
increase  the  production  of  supplies  for  the  army  and  navy  as 
well  as  of  all  the  basic  necessaries  of  life. 

There  are,  however,  two  ways  in  which  these  changes  may 
be  forced  upon  the  people,  whether  they  will  or  no.  If  they 
insist  on  consuming  wastefully  and  spending  their  money  "for 
things  which  are  not  necessary,  while  men  are  being  at  the 
same  time  taken  out  of  productive  industry,  this  unbalancing 
of  supply  and  demand  will  send  prices  so  high  that  most  of  the 
people,  particularly  the  poor  people,  will  not  be  able  to  buy 
anything  but  the  barest  necessaries.  The  well-to-do  may  be 
compelled  to  reduce  their  consumption  and  thereby  reduce  the 
demand  upon  the  undermanned  industries;  that  is  to  say, 
if  the  government  is  wise  enough  it  will  put  such  high  taxes 
upon  their  incomes  as  to  compel  them  to  reduce  their  consump- 
tion and  their  purchases.  In  this  case,  instead  of  buying  sup- 
plies and  hiring  men  with  their  money,  they  will  turn  it  over 
to  the  government,  which  will  then  buy  supplies  and  hire  men 
with  it.  If  the  taxes  are  high  enough,  women  will  be  compelled 
to  do  their  own  housework  and  discharge  their  servants,  men 
will  be  compelled  to  close  their  golf  courses  and  stop  going  to 
ball  games,  and  everybody  will  be  compelled  to  buy  cheaper 
and  more  nutritious  food  and  to  wear  his  old  clothes  longer. 
They  must  do  all  these  things  and  a  multitude  of  others  in 
a  time  when  the  strength  of  the  nation  is  being  put  to  the 
test  and  its  very  life  is  at  stake ;  otherwise  no  nation  can 
successfully  meet  the  test  of  a  great  crisis. 

The  slogan  ct business  as  usual"  in  time  of  a  great  war  was 
trie  result  of  crass  ignorance  of  some  of  the  basic  facts  of 
economic  life.  It  was  sometimes  asserted  in  support  of  that 
slogan  that  the  only  reason  why  the  people  were  well-to-do  was 
that  they  had  been  spending  their  money  for  the  products  of 
industry.  Therefore,  if  the  people  quit  spending  their  money, 
production  would  be  cut  off  and  prosperity  destroyed.  But  a 
little  intelligent  analysis  would  have  shown  that  it  was  not  pro- 


594  PRINCIPLES  OF  NATIONAL  ECONOMY 

posed  to  spend  any  less  money  in  time  of  war  or  to  hire  any 
less  labor  than  in  time  of  peace.  The  obvious  thing  was  that 
the  energy  of  the  people  had  to  be  completely  redirected.  The 
great  purpose  of  most  people  in  time  of  peace  is  to  gratify  their 
desires.  In  time  of  war  the  great  purpose  must  be  to  win  the 
war.  The  energies  which  had  been  devoted  to  the  work  of  pro- 
ducing objects  of  gratification  had  to  be  turned  to  the  work  of 
beating  the  enemy.  If  everyone  had  insisted  on  having  as  many 
objects  of  desire  and  gratification  in  time  of  war  as  in  time  of 
peace,  it  would  have  taken  just  as  many  men  to  produce  these 
objects  of  desire  and  gratification,  and  there  would  have  been 
none  to  spare  for  defending  the  country.  Instead  of  spending 
their  money  directly  for  their  own  private  purposes,  the  obvious 
duty  of  the  people  was  to  turn  over  as  much  of  it  as  they  could 
possibly  spare  and  let  the  government  spend  it  in  purchasing 
war  supplies  and  in  paying  men  to  do  the  few  things  which  are 
supremely  needful  for  the  national  defense. 

Rapid  recovery  after  a  local  disaster.  Even  in  cases  of  great 
local  disaster,  such  as  a  great  fire  or  earthquake,  it  has  been 
remarked  many  times  that  recovery  comes  with  amazing 
rapidity.  In  spite  of  the  fact  that  vast  quantities  of  wealth 
are  destroyed,  the  city  soon  recovers  and  becomes  apparently 
as  prosperous  as  ever.  Luxury  is  supposed  by  some  to  have  an 
important  bearing  on  this  question.  The  energy  which,  before 
the  disaster,  was  spent  in  producing  luxuries  is  now  available 
to  be  spent  in  rebuilding  what  was  destroyed.  In  order  to  do 
this,  however,  the  people  must,  for  a  time  at  any  rate,  reduce 
their  consumption  of  luxuries.  The  individual  whose  property 
has  been  destroyed  is  to  that  extent  poorer  than  he  was  before. 
He  may  borrow  capital  with  which  to  rebuild,  but  until  the 
debt  is  paid  off,  his  effective  income  is  considerably  reduced. 
He  therefore  has  less  money  to  spend  on  articles  of  luxury; 
he  is  virtually  spending  that  money  on  a  new  building. 

The  objection  may  be  raised  that  the  luxury  which  takes  the 
form  of  leisure  would  also  furnish  a  fund  of  energy  for  the 
meeting  of  a  great  national  crisis  or  repairing  a  local  disaster. 


LUXURY  595 

Men  who  have  remained  idle,  enjoying  leisure,  may  now  go  to 
work  to  carry  on  the  war  or  to  rebuild  the  city  which  has  been 
partially  destroyed.  This  objection  is  somewhat  weak,  how- 
ever, because,  in  the  first  place,  habits  of  sloth  and  idleness  are 
much  more  difficult  to  overcome  than  habits  of  lavish  consump- 
tion. The  sheer  inertia  of  the  people  makes  it  almost  impos- 
sible to  rouse  them  to  extra  exertions  in  time  of  crisis,  whereas 
the  people  who  have  been  exerting  themselves  strenuously  in 
the  production  of  articles  of  luxury  may,  with  less  difficulty, 
redirect  their  strenuous  energy.  In  a  sense  the  productive 
machinery  of  the  community  is  already  going.  It  can  be  kept 
going  and  its  direction  changed  more  easily  than  it  can  be 
started  up. 

In  the  second  place,  when  a  community  takes  its  luxury  in 
the  form  of  idleness,  it  is  certain  to  be  ill  equipped  with  the 
machinery  of  production  as  well  as  with  the  technical  knowl- 
edge and  skill  which  are  necessary  to  efficient  production. 
If  it  lacks  machinery  and  technical  knowledge  and  skill  it 
will  not  be  able  to  carry  on  a  modern  war  successfully  or  to 
repair  a  local  disaster,  whereas  a  community  that  takes  its 
luxury  in  the  form  of  material  goods  will  have  learned  in  the 
process  of  production  much  technical  skill  and  will  have 
accumulated  vast  funds  of  machinery  and  tools.  If  there  is 
anything  that  modern  warfare  has  taught,  it  is  the  superiority 
in  war  of  the  nation  that  is  thus  equipped.  The  technical  skill 
and  the  machinery  which  are  accumulated  for  purposes  of  pro- 
duction may  easily  be  turned  to  those  of  destruction,  and  in  war 
the  community  that  is  best  equipped  for  the  work  of  destruc- 
tion will  win.  A  nation  that  habitually  takes  its  luxury  in  the 
form  of  material  goods  and  which  builds  up  a  vast  and  well- 
equipped  industrial  system,  with  a  great  deal  of  scientific 
knowledge  and  technical  skill,  has  nothing  to  fear  from  a  nation 
that  takes  its  luxury  in  the  form  of  leisure. 

Reducing  the  rate  of  permanent  construction.  So  far  the  argu- 
ment seems  conclusive  in  favor  of  material  luxury  as  against 
immaterial  luxury  in  the  form  of  leisure  and  idleness.  We  are 


596  PRINCIPLES  OF  NATIONAL  ECONOMY 

far,  however,  from  a  complete  justification  of  luxury  in  the 
ordinary  sense.  The  community  that  is  in  the  habit  of  invest- 
ing its  money  for  the  future  rather  than  of  buying  objects  of 
immediate  gratification  will  likewise  have  a  fund  of  surplus 
energy  at  its  disposal.  All  the  energy  which  has  been  devoted 
to  permanent  construction  for  the  future  good  of  society  may, 
in  time  of  great  national  crisis  or  local  disaster,  be  redirected 
toward  meeting  the  crisis  or  repairing  the  local  damage.  The 
kind  of  skill  which  is  necessary  to  permanent  construction  is  of 
quite  as  high  an  order  as  the  kind  which  is  necessary  to  the 
production  of  ephemeral  articles  of  consumption.  All  the  ad- 
vantages, in  short,  which  a  luxurious  community  possesses  for 
the  meeting  of  a  great  crisis  are  also  possessed  by  the  thrifty 
community  which  spends  a  good  portion  of  its  income  in  dur- 
able construction  and  in  building  for  future  generations.  In 
the  long  run  the  nation  that  spends  a  large  portion  of  its  energy 
in  permanent  construction  will  have  certain  advantages  over 
the  one  that  consumes  luxuriously.  If  every  farmer,  for  ex- 
ample, should  put  back  into  his  farm  a  part  of  his  annual 
income,  in  the  way  of  improvement  of  the  soil,  in  ditching, 
draining,  fencing,  and  building,  he  would  be  using  up  surplus 
energy  just  as  truly  as  if  he  spent  that  amount  of  money  in 
luxurious  consumption.  In  time  of  national  crisis  he  can  sus- 
pend, for  the  time,  further  building  and  improvements  on  his 
farm  and  have  energy  to  spare  for  the  production  of  more 
food ;  or  he  can  dispense  with  a  certain  amount  of  hired  help, 
which  will  then  be  available  for  government  purposes.  After  a 
few  generations  the  nation  whose  farmers  systematically  put 
back  into  their  farms  a  part  of  their  incomes  will  have  much 
better  farms  and  much  greater  productive  power  than  the 
nation  which  merely  keeps  its  agricultural  wealth  intact  and 
spends  the  surplus  in  luxurious  consumption. 

That  which  applies  to  farms  applies  also  to  factories,  shops, 
and  all  other  productive  establishments.  The  community  which 
is  in  the  habit  of  adding  to  its  accumulated  wealth  in  each 
generation  by  investing  a  part  of  its  income  in  tools  and  in- 


LUXURY  597 

strumentu  for  future  production  will,  after  the  lapse  of  a  few 
generations,  be  vastly  stronger  than  the  community  which 
merely  keeps  its  productive  power  intact  and  consumes  all  its 
income.  Thus  we  reach  the  conclusion  that  although  the  luxuri- 
ous consumption  of  material  articles  may  be  very  much  better 
than  the  luxurious  enjoyment  of  leisure,  nevertheless  thrift, 
forethought,  and  the  investment  of  incomes  in  instruments  for 
future  production  are  better  still.  He  who  does  less  well  than 
he  can,  does  ill.  Therefore  he  who  consumes  luxuriously  when 
he  might  invest  productively  is  doing  badly. 


CHAPTER  XLIV 
THE  CONTROL  OF  CONSUMPTION 

Sumptuary  laws.  Luxurious  consumption  can  undoubtedly 
be  condemned  on  economic  grounds  as  being  less  desirable 
than  frugality,  forethought,  and  the  investment  of  funds  in 
productive  industries  and  objects  of  durable  satisfaction. 
Nevertheless  it  does  not  follow  of  necessity  that  the  govern- 
ment should,  through  sumptuary  laws,  attempt  to  repress 
luxury.  To  prohibit  the  consumption  of  articles  of  luxury 
might  very  easily  take  away  the  motive  to  industry.  If  the 
people  cannot  have  expensive  commodities  they  may  take  their 
luxury  in  the  form  of  leisure,  idleness,  and  self-amusement. 
This,  as  we  saw  in  the  last  chapter,  is  even  less  desirable  than 
luxurious  consumption.  If  we  grant  the  argument  used  by 
Mill  and  others,  to  the  effect  that  an  increase  of  wants  some- 
times has  the  effect  of  overcoming  the  tendency  to  sloth  and 
idleness,  it  would  follow  that  if  the  government  should  make  it 
impossible  for  men  to  gratify  these  increased  wants,  it  would 
merely  drive  the  people  back  into  sloth  and  idleness.  This 
could  be  counteracted  only  by  other  laws,  compelling  them  to 
work,  which  would  be  a  kind  of  slavery.  Even  the  slogan 
"  Necessaries  for  all  before  luxuries  for  any,"  while  good  enough 
in  itself,  would  be  a  very  difficult  policy  to  enforce.  It  is  quite 
possible  that  the  many  will  secure  more  necessaries  if  the  con- 
spicuously capable  producers  are  allowed  some  luxuries  as  a 
motive  to  production  at  their  full  capacity.  In  other  words,  if 
the  most  capable  producers  are  limited  by  authority  to  the 
necessaries  of  life,  which  they  could  easily  earn  with  a  fraction 
of  their  time,  they  are  likely  to  take  their  luxuries  in  the  form 
of  leisure,  thus  limiting  their  production  of  necessaries  or  their 

598 


THE  CONTROL  OF  CONSUMPTION       599 

performance  of  useful  services.  In  this  case  the  poor  would 
have  fewer  necessaries  than  if  the  capable  producer  were 
allowed  adequate  motivation  for  working  to  his  full  capacity. 

Legislative  control  not  always  effective.  One  of  the  last 
things  that  we  learn  regarding  legislation  is  that  it  usually  takes 
a  large  number  of  new  legislative  acts  to  correct  or  counteract 
the  unlooked-for  results  of  any  legislative  act.  Another  objec- 
tion to  legislative  attempts  to  suppress  luxurious  consumption 
is  the  one  pointed  out  by  Adam  Smith  and  others,  to  the  effect 
that  when  their  habits  of  life  are  fixed,  men  and  women  will 
frequently  give  up  the  necessaries  of  life  before  they  will  give 
up  luxuries.  This  applies  especially  to  the  attempts  to  make 
luxuries  expensive  by  taxing  them.  When  they  become  very 
expensive  some  people  will  insist  on  having  them  even  if  it 
takes  their  whole  income  to  buy  them  and  leaves  them  little 
for  the  necessaries  of  life. 

These  arguments,  it  will  'be  noticed,  are  based  upon  the  in- 
efficiency of  sumptuary  laws  rather  than  upon  any  more  funda- 
mental objection  to  them.  In  general  they  seem  to  produce 
results  which  are  worse  than  the  thing  they  try  to  cure.  Noth- 
ing whatever  can  be  said,  however,  against  a  voluntary  fore- 
going of  luxuries  and  a  rationalizing  of  standards  of  living  on 
the  part  of  the  people  themselves.  It  is  one  thing  for  the  people 
to  want  the  right  things ;  it  is  quite  a  different  thing  to  try  to 
force  them  to  consume  the  right  things  whether  they  want  them 
or  not.  It  is  one  thing  for  the  people  voluntarily  to  give  up 
luxuries ;  it  is  quite  a  different  thing  to  compel  them  by  law  to 
do  so,  whether  they  are  willing  or  not. 

Control  of  vice  is  "sumptuary  legislation."  In  some  extreme 
cases,  however,  a  luxury  becomes  so  extremely  demoralizing 
and  dangerous  to  society  as  to  justify  government  regulation 
or  suppression.  There  may  be  undesirable  results  of  such  legis- 
lation,— there  are  pretty  certain  to  be  ;  but  if  these  undesirable 
results  are  less  undesirable  than  the  thing  which  is  suppressed, 
there  is  a  net  gain.  Regulation  or  suppression  of  vice  of  all 
kinds  is  a  kind  of  sumptuary  legislation.  If  the  vicious  habit 


6oo 

or  the  vicious  form  of  consumption  is  sufficiently  injurious  its 
suppression  is  justifiable,  even  though  some  undesirable  results 
may  follow  its  suppression. 

There  are,  however,  a  good  many  sentimental  objections  to 
sumptuary  laws  which  have  no  connection  with  the  real  objec- 
tions. We  are  all  consumers,  and  if  the  government  begins 
regulating  consumption  we  are  each  of  us  likely  to  come  in  for 
a  certain  amount  of  regulation.  We  are  rather  impatient  of  all 
kinds  of  regulation  when  it  is  applied  to  ourselves,  though  we 
may  be  very  patient  in  regard  to  the  regulation  of  other  people, 
as  we  are  patient  in  the  contemplation  of  other  people's  troubles. 
We  are  not  all  of  us  in  the  banking  or  the  railroad  business, 
and  do  not  feel  in  danger  when  the  government  undertakes  to 
regulate  those  and  other  special  lines  of  business. 

No  essential  difference  between  controlling  business  and 
controlling  consumption.  This  consideration  has  led  to  quasi- 
serious  attempts  to  draw  a  sharp  distinction  between  the  regu- 
lation or  control  of  business  and  the  regulation  or  control  of 
consumption.  But  all  such  distinctions  are  trivial.  Habits  of 
consumption,  as  stated  above,  are  quite  as  important  to  the 
welfare  of  the  nation  as  are  methods  of  doing  business.  To 
attempt  to  regulate  or  control  either  is  certain  to  produce  unde- 
sirable results.  Nevertheless,  where  the  evils,  either  of  unregu- 
lated consumption  or  of  unregulated  business,  are  great  enough 
we  must  have  regulation  and  take  our  chances  with  the  evils 
and  difficulties  of  regulation.  When  we  forget  our  own  personal 
interests  and  begin  to  think  in  terms  of  the  prosperity,  power, 
and  greatness  of  the  nation,  all  our  sentimental  objection  to 
either  form  of  regulation  will  disappear  and  we  shall  begin 
to  weigh  the  evils  of  lack  of  regulation  against  the  evils  of 
regulation.  Whenever  the  balance  turns  in  favor  of  regulation 
we  shall  be  ready  for  it. 

The  national  rather  than  the  personal  point  of  view.  If  one 
will  look  around  and  see  what  is  going  on,  one  will  discover 
that  the  people  who  think  in  terms  of  nationality  rather  than 
in  terms  of  self-gratification  are  just  as  prone  to  legislate  on 


THE  CONTROL  OF  CONSUMPTION  601 

matters  of  consumption  as  on  matters  of  business.  It  is  only 
those  who  think  in  terms  of  their  own  interest  who  are  likely 
to  make  any  distinction.  Again,  regulation,  control,  or  sup- 
pression of  the  consumption  of  alcohol  is  today  one  of  the  most 
widespread  and  democratic  movements  in  the  world.  Very 
few  of  those  who  favor  this  kind  of  legislation — generally  none 
of  those  who  lead  in  the  movement — have  anything  personal 
to  gain  by  it.  Most  of  them  do  not  use  alcohol,  and  it  does 
them  very  little  direct  harm.  The  suppression  of  liquor  is 
favored  by  those  who  have  been  here  long  enough  to  develop 
a  sense  of  nationality.  It  is  opposed  mainly  by  those  who  have 
not  been  here  long  enough  to  develop  an  interest  in  the  future 
prosperity,  power,  and  greatness  of  the  nation. 

Whenever  a  nation  is  facing  a  great  crisis  in  its  history; 
when  its  strength  and  endurance  are  being  put  to  a  severe  test ; 
when,  in  short,  it  is  fighting  for  its  life  as  a  nation, — the  people 
are  forced  to  think  in  terms  of  national  life  rather  than  in  terms 
of  individual  life.  At  such  times  the  people  find  it  just  as  neces- 
sary that  the  government  shall  regulate  consumption  as  that  it 
shall  regulate  production.  They  also  find  that  freedom  of 
speech  is  not  more  sacred  or  inviolable  than  freedom  of  run- 
ning a  business.  Military  necessity  always  inaugurates  a 
regime  of  regulation  and  compulsion.  War  is  compulsory  busi- 
ness from  beginning  to  end.  When  a  nation  enters  upon  a  great 
war  it  passes  instantly  from  the  realm  of  gold  to  the  realm  of 
iron, —  from  a  realm  in  which  a  price  list  is  followed  and  volun- 
tary agreement  is  the  general  rule  to  one  in  which  authority 
is  obeyed  and  compulsion  is  the  general  rule.  Compulsion  is 
likely  to  apply  in  all  fields  of  activity,  not  simply  in  the  field 
of  production  and  business  management,  of  transportation  and 
food  distribution,  but  also  in  the  field  of  consumption  and  even 
in  the  field  of  selling  talk  for  a  profit. 

Vice  as  a  selective  agent.  One  of  the  strongest  arguments 
against  the  public  regulation  of  vice  or  injurious  forms  of  con- 
sumption is  that  vice  acts  as  a  fool-killer  and  helps  to  rid  the 
world  of  those  undesirable  persons  who  are  unable  to  withstand 


602  PRINCIPLES  OF  NATIONAL  ECONOMY 

temptation.  There  is  some  merit  in  this  argument,  and  if  the 
fool-killer  worked  with  more  accuracy  than  it  seems  to  do,  so 
that  no  one  but  the  guilty  individual  ever  suffered  from  his 
guilt,  the  argument  in  its  favor  would  be  very  strong.  Un- 
fortunately there  are  not  many  cases  in  which  the  vicious 
individual  injures  no  one  but  himself.  He  is  quite  as  likely 
to  injure  others  as  himself.  If  it  were  true  that  the  in- 
dividual who  succumbs  to  vice  never  injured  anybody  else  but 
himself,  it  might  be  argued  with  a  good  deal  of  reason  that 
the  best  way  to  get  rid  of  him  would  be  to  allow  him  to  destroy 
himself  as  rapidly  as  possible, — that  by  so  doing  we  should  in 
the  course  of  time  build  up  a  strong  race  of  people,  who  could 
live  in  the  presence  of  temptation  without  injury.  In  a  certain 
primitive  state  of  society,  where  there  was  little  interdepend- 
ence of  parts,  all  this  might  be  true.  In  a  highly  complex 
society,  such  as  that  with  which  we  are  acquainted,  it  is  not 
true.  The  individual  who  succumbs  to  vice  may  be  a  menace 
to  the  whole  community.  The  danger  is  not  confined  to  the 
innocent  members  of  his  own  family,  who  are  of  course  fre- 
quently reduced  to  want  and  humiliation  through  no  fault  of 
their  own. 

We  must  keep  certain  large  and  tangible  facts  always  before 
us  when  we  are  considering  questions  of  this  kind.  The  chauf- 
feur who  destroys  his  dependableness  through  his  own  vice  may 
occasionally  injure  himself,  but  he  is  rather  more  likely  to 
injure  other  people.  The  locomotive  engineer  who  becomes 
incapacitated  through  any  kind  of  vice  or  bad  habit  may 
occasionally  destroy  himself,  but  he  usually  destroys  a  number 
of  others  in  the  process.  The  motorman,  the  train  dispatcher, 
the  surgeon,  the  drug  clerk,  and  a  multitude  of  others  who  are 
in  responsible  positions — and  in  our  interlocking  civilization 
we  are  all  coming  to  hold  responsible  positions — imperil  others 
quite  as  much  as  themselves  if  they  ever  become  irresponsible 
and  undependable  through  drunkenness  or  any  other  vice. 

Let  us  grant  for  the  sake  of  argument  that  fool-killers  are 
needed  to  prevent  the  world  from  being  filled  with  fools  and  let 


THE  CONTROL  OF  CONSUMPTION 


603 


us  grant  also  that  certain  vices  function  as  fool-killers.  Still, 
we  should  have  a  right  to  insist  that  the  fool-killers  should  work 
accurately  rather  than  inaccurately ;  that  is,  that  they  should 
kill  only  the  fools  and  not  endanger  the  lives  of  others.  Any- 
thing that  works  inaccurately  works  inefficiently,  from  the 
standpoint  of  race  improvement. 

This  may   be  illustrated   arithmetically   by  means   of   the 
following  tables : 


i 

IO 

9 
8 

7 
6 

5 
4 
3 


Average  5.5 


II 

IO 

9 
8 

7 
5 

3 

z 


Average  6.6 


in 

10 


•Average  7 


Let  us  assume  that  we  have  ten  individuals,  graded  numeri- 
cally, according  to  their  relative  wisdom  or  foolishness.  At 
the  bottom  of  the  scale  we  rank  those  graded  as  i,  2,  3,  etc., 
whom  we  may  designate  as  fools.  We  ascend  through  the 
moderately  wise  to  the  very  wise,  whom  we  will  grade  as  8,  9, 
and  10.  The  average  of  the  whole  group  will  be  5.5,  as  shown 
by  the  first  table.  Now  let  us  suppose  that  an  inaccurate  and 
ineffective  fool-killer  is  at  work,  as  shown  in  table  II.  In- 
stead of  canceling  only  numbers  1,2,  and  3,  he  cancels  i  and  2 
and  also  4,  6,  and  9.  Here  is  a  rather  wholesale  slaughter, 
involving  a  death  rate  of  50  per  cent,  and  yet  the  average  is 
raised  only  from  5.5  to  6.6.  This  is  a  pretty  heavy  price  to 
pay  for  so  slight  an  improvement.  If,  however,  the  fool-killer 
worked  accurately,  as  shown  in  table  III,  canceling  only  num- 
bers i,  2,  and  3,  the  average  of  the  survivors  is  now  7.  Here 
we  have  a  much  lower  percentage  of  slaughter,  resulting  in  a 
much  higher  improvement  in  the  average.  There  is  something 


604  PRINCIPLES  OF  NATIONAL  ECONOMY 

to  be  said  for  a  fool-killer  that  operates  so  accurately  as  this. 
There  is  a  great  deal  to  be  said  against  the  one  that  operates  so 
inaccurately  as  the  one  in  table  II. 

Now  the  question  is,  Does  the  vice  in  question  operate  ac- 
curately or  inaccurately?  Let  us  take,  for  example,  the  vice 
of  drunkenness,  and  grant  that  a  locomotive  engineer  who  gets 
drunk  is  very  likely  to  be  killed  in  a  train  wreck ;  but  if,  at 
the  same  time,  he  kills  several  other  people  who  are  not 
drunkards  his  vice  is  obviously  working  rather  inaccurately. 
Let  us  grant  that  the  automobile  driver  who  gets  drunk  is 
likely  to  kill  himself  sooner  or  later;  yet  if  he  kills  several 
other  people,  some  of  whom  are  not  drunkards,  vice  is  again 
working  rather  inaccurately  and  therefore  ineffectively.  In 
fact,  anyone  in  a  responsible  position  is  likely  to  injure  a  good 
many  other  people  besides  himself  if  he  is  addicted  to  any  vice 
that  destroys  his  dependability. 

Any  vice  which  acts  so  swiftly  and  so  injuriously  must  seri- 
ously endanger  the  rest  of  society  and  must  obviously  call  for 
public  regulation.  This  applies  not  simply  to  the  extremely 
injurious  forms  of  consumption  known  as  vice,  but  to  any  kind 
of  injurious  or  irrational  consumption,  such  as  luxury.  In  a 
time  of  national  crisis,  when  every  ounce  of  productive  energy 
is  needed  to  meet  the  situation,  he  who  consumes  luxuriously 
is  causing  the  waste  of  productive  energy  and  is  thus  inter- 
fering with  the  success  of  the  nation.  In  time  of  war,  when 
armies  and  navies  must  be  raised,  ships  and  munitions  manu- 
factured on  a  vast  scale,  and  food  and  clothing  produced  more 
abundantly  than  ever,  the  question  is  always  one  of  econo- 
mizing productive  power.  To  use  up  any  of  this  power  need- 
lessly in  the  production  of  luxuries  is  to  take  it  out  of  the 
nation's  industries  and  even  to  threaten  national  disaster.  In 
such  times  the  injury  which  follows  from  luxurious  consump- 
tion is  so  desperate  as  to  justify  public  regulation.  Even  though 
some  injurious  results  may  follow  from  this  regulation,  these 
can  scarcely  be  any  greater  than  those  which  follow  the 
unregulated  consumption  of  luxuries. 


THE  CONTROL  OF  CONSUMPTION  605 

In  normal  times  the  danger  from  luxurious  consumption  is 
not  so  acute  and  the  need  for  regulation  is  therefore  not  so 
great.  In  this  case  we  may  have  to  consider  whether  luxurious 
consumption  is  more  injurious  than  the  efforts  to  regulate  it. 
This  consideration,  however,  applies  to  all  other  forms  of  regu- 
lation and  control.  There  is  involved  here  a  question  of  balance 
of  profit  and  loss.  It  is  highly  important  that  on  all  questions 
of  regulation  we  balance  the  accounts  carefully.  There  is 
some  cost  in  the  mere  extension  of  government  control  and  the 
consequent  multiplication  of  government  offices.  This  diverts 
men  from  productive  industry  into  government  jobs.  Unless 
they  can  save  more  to  the  country  through  their  efforts  as 
government  officials  than  they  could  produce  if  they  were  left 
in  productive  industry,  the  loss  is  greater  than  the  profit. 
Again,  if  through  too  much  regulation  legitimate  industries  are 
discouraged  to  a  degree  that  more  than  offsets  any  saving  which 
comes  from  regulation,  there  is  always  a  net  loss.  In  the  case 
of  mild  luxuries  which  work  no  very  serious  injury  to  anybody, 
the  general  rule  has  been  not  to  waste  any  energy  by  multiply- 
ing government  offices  in  order  to  suppress  them.  But  in  times 
of  national  crisis  the  policy  with  respect  even  to  mild  luxuries 
may  have  to  be  changed.  In  normal  times  as  well  as  in 
times  of  crisis  the  injury  from  certain  extreme  forms  of  luxury 
may  be  so  great  as  to  justify  permanent  control,  regulation, 
or  suppression. 

Luxurious  consumption  does  not  increase  the  demand  for  labor. 
There  can  be  no  doubt,  however,  that  luxurious  consumption 
is  in  itself  an  injury  to  the  public  and  particularly  to  the  labor- 
ing classes,  however  inexpedient  it  might  be  for  the  govern- 
ment to  use  its  power  of  compulsion  to  prohibit  luxury.  There 
is  an  ancient  and  nauseous  fallacy  to  the  effect  that  the  extrava- 
gance of  the  rich  gives  employment  to  the  poor.  Nothing 
could  be  any  farther  from  the  truth.  The  extravagance  of  the 
rich  gives  much  less  employment  to  the  poor  than  do  accumu- 
lation by  the  rich  and  their  investment  in  various  kinds  of  pro- 
ductive industry.  The  individual  who  buys  extravagantly  does 


6o6  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  course  set  labor  to  work  producing  the  objects  of  extrava- 
gance, but  the  individual  who  invests  largely  also  sets  labor  to 
work  producing  the  buildings,  tools,  etc.  in  which  he  invests.  In 
addition  to  this  he  adds  definitely  to  the  productive  power  of 
the  community.  Furthermore,  labor  must  be  hired  to  make  use 
of  the  buildings  and  the  tools,  and  there  is  a  larger  social  prod- 
uct out  of  which  to  pay  their  wages.  Comparatively  speaking, 
therefore,  the  extravagance  of  the  rich  takes  away  from  the 
employment  of  the  poor.  From  that  point  of  view  extravagant 
consumption  is  a  social  injury. 

Leisure  versus  luxury.  If,  as  suggested  above,  there  were  no 
ulterior  results  from  the  suppression  of  extravagance,  the  state 
would  be  fully  justified  in  such  a  course  ;  but  if  the  suppression 
of  extravagance  produced  merely  leisure  and  idleness,  instead 
of  extravagance,  more  harm  than  good  would  be  done.  We 
must  conclude,  therefore,  that  where  a  form  of  consumption 
has  become  so  definitely  vicious  and  injurious  to  the  rest  of 
society  as  to  produce  more  harm  than  would  probably  be  pro- 
duced by  compulsory  suppression,  suppression  must  be  justified. 
But  where,  even  though  it  be  harmful,  it  is  not  more  harmful 
than  other  results  which  would  probably  follow  from  its  sup- 
pression, suppression  is  not  justifiable.  It  must  be  remembered, 
however,  that  laws  suppressing  vice  are  in  a  sense  sumptuary 
laws.  The  only  difference  between  these  and  other  sumptuary 
laws  lies  in  the  fact  that  the  forms  of  consumption  which  they 
attempt  to  regulate  or  suppress  meet  with  such  general  disap- 
proval as  to  make  their  suppression  popular,  whereas  in  other 
cases  the  forms  of  consumption  are  not  universally  condemned 
and  their  suppression  is  therefore  not  generally  approved. 

Rationing  the  people.  That  school  of  social  philosophers  who 
hold  that  all  forms  of  competition  are  inherently  evil,  and  that 
therefore  government  compulsion  and  regimentation  should  be 
made  use  of  to  stop  competition,  would,  if  they  were  consistent, 
desire  to  begin  with  sumptuary  regulations.  As  stated  in  a 
previous  chapter,  there  are  three  main  forms  of  economic  com- 
petition,— competitive  production,  competitive  bargaining,  and 


THE  CONTROL  OF  CONSUMPTION  607 

competitive  consumption, — and  of  these  three,  competitive  con- 
sumption is  infinitely  worse  than  either  of  the  others.  By 
an  authoritative  standardization  of  wearing-apparel,  food,  and 
other  articles  of  consumption  we  should  tend  to  eliminate  this 
worst  form  of  competition.  That  would  involve,  of  course,  the 
organization  of  society  on  a  semimilitary  basis,  though  the 
object  need  not  be  military  conflict.  It  would  mean  the  pre- 
scribing of  a  satisfactory  uniform  for  all  members  of  the 
community  and  also  of  a  uniform  diet  or  ration.  Houses,  fur- 
niture, and  other  consumable  goods  as  well  would  have  to  be 
standardized  and  prescribed  by  government  regulations. 

There  is  no  doubt  whatever  that  if  the  people  would  accept 
this  kind  of  regimentation  and  work  cheerfully  under  it,  we 
should  prevent  the  waste  of  a  vast  amount  of  energy  and  avoid 
many  petty  jealousies  and  heartburnings.  Academic  costume, 
whatever  may  be  said  against  it  on  other  grounds,  has  the  advan- 
tage of  saving  academicians  a  great  deal  of  perplexity  over  the 
question  "Wherewithal  shall  we  be  clothed?"  The  costumes 
and  vestments  of  certain  religious  orders  answer  the  same  pur- 
pose. There  are  also  many  religious  sects,  of  which  the  Quakers 
of  the  old  school  were  a  good  illustration,  which  have  succeeded 
in  saving  their  people  from  that  destructive  form  of  competition 
which  strives,  first,  to  outshine  one's  neighbors  in 'matters  of 
dress  and,  second,  not  to  be  outshone  by  one's  neighbors. 

In  a  time  of  great  national  crisis  we  have  many  illustrations 
of  what  people  may  accomplish  in  the  way  of  economy  and 
effort  by  putting  the  whole  nation  on  a  fixed  ration  and  also  by 
prescribing  the  manner  of  dress  of  each  class  of  the  nation.  If 
the  people  would  submit  cheerfully  to  similar  regulations  in  time 
of  peace,  the  vast  energy  which  in  time  of  war  is  devoted  to  the 
work  of  destruction  could  then  be  turned  to  the  work  of  pro- 
duction, and  industrial  progress  could  proceed  at  a  stupendous 
rate.  It  is  not  impossible  that  at  some  time  in  the  future  there 
may  be  a  real  effort  on  the  part  of  certain  ambitious  nations 
to  economize  their  energy  in  this  way  in  order  that  they  may 
increase  their  strength  rapidly  in  preparation  for  Armageddon. 


CHAPTER  XLV 

THE  BATTtE  OF  THE  STANDARDS 

Competitive  and  cheap  standards  of  living.  It  has  generally 
been  taken  for  granted  that  the  cheap  standard  of  living  would 
drive  out  a  dear  standard.  It  is  asserted  that  people  who  are 
willing  to  live  and  multiply  on  a  very  small  income  will  always 
tend  to  displace  those  who  are  unwilling  to  live  and  multiply 
except  on  a  liberal  income.  If  sheep  and  cattle  are  allowed  to 
multiply  and  wander  at  will  over  the  same  pasture,  it  is  plain 
that  the  sheep  will  drive  out  the  cattle,  not  because  they  are 
superior  in  value  or  in  fighting-power  but  merely  because  they 
are  able  to  nibble  closer  to  the  ground  and  to  live  where  cattle 
would  starve.  A  similar  law  appears  to  operate  throughout  the 
human  as  well  as  the  animal  world.  Those  who  can  live  on 
the  least  seem  at  times  to  be  able  to  drive  out  all  others  by 
eating  them  out  of  house  and  home. 

It  must  be  confessed  that  there  are  some  facts  which  seem  to 
support  this  conclusion.  The  American  laborers  on  the  Pacific 
coast  find  it  very  difficult  to  compete,  at  least  in  the  unskilled 
trades,  with  the  Chinese  and  the  Japanese.  On  the  Atlantic 
seaboard  employers  of  labor  have  been  able  to  tap  various 
reservoirs  of  cheap  labor,  first  in  northwestern  Europe  and  later 
in  southern  and  eastern  Europe.  These  laborers,  having  been 
accustomed  to  very  small  incomes,  are  able  and  willing  to 
work  and  multiply  on  incomes  so  small  as  to  drive  out,  at 
once  or  ultimately,  either  the  American  laborers  or  the  foreign 
laborers  of  a  previous  immigration.  The  later  immigrants 
drive  out  the  earlier  immigrants  directly  by  accepting  lower 
wages  than  the  earlier  immigrants  are  willing  to  accept ;  they 
drive  them  out  indirectly  by  multiplying  rapidly  and  thus 

supplying  a  new  stock  of  labor  where  the  others  would  refuse 

608 


THE  BATTLE  OF  THE  STANDARDS  609 

to  multiply.  In  many  farming  communities  it  is  found  like- 
wise that  foreign-born  farmers,  who  are  willing  to  live  on  less 
than  the  American-born  farmers,  can,  if  necessary,  pay  either 
a  rent  or  a  price  for  land  which  would  bankrupt  the  American 
farmer  with  his  higher  cost  of  living.  Thus  the  land  tends  to 
pass  into  the  hands  of  those  farmers  with  the  cheap  standard 
of  living.  On  the  Pacific  coast,  again,  the  same  tendency  shows 
itself.  The  Chinese  and  Japanese  farmers  and  gardeners  are 
economically  able  to  buy  or  rent  land  at  a  price  which  an  Amer- 
ican farmer  with  his  higher  standard  of  living  would  find  impos- 
sible. Their  competition,  where  they  live  in  large  numbers, 
forces  the  price  or  the  rent  of  land  to  a  ruinous  height  from  the 
standpoint  of  an  American  farmer. 

A  cheap  standard  does  not  always  drive  out  a  dear  standard. 
It  must  be  pointed  out,  however,  that  not  every  people  with  a 
low  standard  of  living  has  high  competing  power.  The  Mexi- 
can peons  have  as  cheap  a  standard  of  living  as  the  Chinese 
coolies,  and  yet  they  do  not  compete  successfully  even  with 
Americans,  who  have  a  higher  standard  of  living.  In  other  words, 
there  must  be  coupled  with  a  cheap  standard  of  living  consider- 
able industrial  efficiency.  With  equal  industrial  efficiency,  the 
race  with  a  cheaper  standard  of  living  seems  to  have  the  advan- 
tage in  economic  competition.  On  the  other  hand,  with  an  equal 
standard  of  living,  the  race  with  the  higher  industrial  efficiency 
has  the  same  advantage  in  economic  competition.  In  fact,  we 
find  that  even  with  a  more  expensive  standard  of  living,  the 
race  whose  industrial  efficiency  expands  in  proportion  to  its 
cost  of  living  holds  its  advantage  in  economic  competition. 

Competing  power  is  equal  to  production  minus  consumption. 
This  brings  us  back  to  the  formula  which  was  used  in  a  previous 
chapter  to  express  the  value  of  a  man:  V—P  —  C.  The  value 
of  a  man  is  equal  to  his  production  minus  his  consumption.  By 
his  value  we  mean  his  value  to  his  race  or  nation.  That  which 
he  adds  to  the  total  resources  of  his  nation  in  excess  of  what  he 
extracts  from  those  resources  is  his  net  contribution  to  its 
strength.  That  nation  will  be  strongest,  in  the  long  run,  whose 


6io  PRINCIPLES  OF  NATIONAL  ECONOMY 

average  citizen  has  the  highest  value  in  this  sense.  That  na- 
tion will  be  weakest,  in  the  long  run,  whose  average  citizen 
has  the  lowest  value  in  this  sense.  But  that  citizen's  value 
may  be  increased,  not  simply  by  reducing  his  consumption  but 
by  increasing  the  difference  between  his  consumption  and  his 
production.  Adding  to  his  production  is  just  as  essential  as 
keeping  his  consumption  within  efficient  bounds. 

If  we  seek  a  formula  which  shall  express  the  competing  power 
of  a  whole  nation,  it  must  be  very  closely  related  to  the  formula 
which  expresses  the  value  of  one  of  its  citizens.  That  formula 
is  CP  —P  —  C ;  that  is,  the  competing  power  of  a  nation  is  equal 
to  its  production  minus  its  consumption.  The  nation  or  the 
race  in  which  there  is  the  widest  margin  between  production 
and  consumption  will  win  in  economic  competition  against  all 
comers.  If  the  American  farmer  were  enough  more  efficient  as 
a  producer  than  the  foreign-born  farmer  to  compensate  for  his 
higher  cost  of  living,  he  could  hold  his  own  indefinitely  in 
economic  competition.  It  is  not,  therefore,  the  cheap  standard 
of  living  which  invariably  wins ;  it  is  the  efficient  standard  of 
living.  A  race  with  an  expensive  standard  of  living,  provided 
every  dollar  of  expense  adds  something  to  its  productive  effi- 
ciency, will  always  win  in  competition  with  a  race  with  a  cheap 
standard  of  living.  If,  however,  the  expensive  standard  is  made 
expensive  merely  by  the  demand  for  luxuries  and  means  of  dis- 
sipation, the  race  is  hopelessly  handicapped  and  must  ulti- 
mately lose  in  competition  with  other  races.  But  if  the  cost  of 
living  is  made  high  by  the  demand  for  strength-giving  food  and 
recreation,  for  means  of  mental  stimulation,  or  for  books, 
instruments  of  precision,  and  other  means  of  technical  educa- 
tion, such  a  standard  of  living  may  increase  the  margin  between 
production  and  consumption  rather  than  diminish  it.  In  that 
case  not  only  can  the  race  possessing  such  a  standard  hold 
its  own  in  competition  at  home  but  the  members  of  that  race 
can  go  anywhere  in  the  world  and  hold  their  own  in  compe- 
tition against  the  natives.  Such  a  race  will  be  an  expanding, 
colonizing  race — wherever  its  members  plant  themselves  they 


THE  BATTLE  OF  THE  STANDARDS  611 

will  succeed  and  remain ;  whereas,  if  their  standard  of  living  is 
merely  expensive  without  being  efficient,  they  are  likely  to  fail 
as  colonizers. 

International  competition.  A  race  with  a  high  but  inefficient 
standard  of  living  sometimes  finds  it  necessary  to  protect  itself, 
at  least  within  its  own  boundaries,  against  the  competition  of 
races  with  a  cheaper  but  more  efficient  standard.  Otherwise 
they  would  find  themselves  ultimately  dispossessed  even  of 
their  land.  The  race  with  the  cheaper  and  more  efficient  stand- 
ard would  not  only  get  the  jobs  in  industry  but  would  even- 
tually buy  the  farms  and  the  businesses  at  prices  which  the 
natives  would  be  unable  to  pay.  The  natives  would  give  way 
before  such  a  race  as  inevitably  as  before  an  army  equipped 
with  superior  weapons  of  offense. 

Moreover,  the  problem  is  not  solved  by  the  mere  exclusion 
from  our  own  territory  of  races  with  a  cheaper  and  more  effi- 
cient standard  of  living.  The  conflict  is  merely  changed  to 
another  field  and  the  outcome  postponed  to  a  more  remote 
period  of  time.  International  competition  is  just  as  real  as. 
individual  competition  within  the  nation,  though  it  does  not 
seem  so  real  to  the  average  person.  In  the  competition  for  the 
markets  of  the  world  the  race  with  the  cheaper  and  more  effi- 
cient standard  will  have  the  same  advantage  as  it  would  have 
in  getting  jobs  or  in  buying  farms  and  businesses  within  the 
confines  of  a  given  country. 

The  race  with  the  expensive  or  inefficient  standard  may  hold 
certain  advantages  because  of  the  peculiarities  of  its  geographi- 
cal situation.  If  it  possesses  superior  soil  or  superior  mineral 
deposits,  these  physical  advantages  may  compensate,  in  part  at 
least,  for  the  inefficiency  of  its  standard  of  living  and  enable  it 
to  survive  in  international  competition.  Superior  mineral  de- 
posits, however,  must  ultimately  be  exhausted.  Superior  soil 
can  be  maintained  only  by  wise  management.  The  nation  that 
depends  upon  these  material  advantages  for  its  future  strength 
in  international  competition  must  look  well  to  its  problem  of 
conservation.  If  it  does  not,  it  will  eventually  lose  these  advan- 


6i2  PRINCIPLES  OF  NATIONAL  ECONOMY 

tages  and  then  its  more  expensive  standard  of  living  will  place 
it  under  a  severe  handicap.  If  so,  it  need  not  necessarily  perish 
as  a  nation,  but  at  best  it  will  live  at  a  "poor  dying  rate." 

Even  under  conditions  of  international  peace,  here  is  a  form 
of  international  rivalry  which  will  still  persist  and  under  which 
the  victory  must  ultimately  go  to  the  race  or  the  nation  with 
the  most  efficient  standard  of  living ;  that  is,  to  the  race  or 
nation  in  which  the  production  of  the  average  person  exceeds 
his  consumption  by  the  widest  margin. 

The  real  Armageddon.  Here  is  a  real  Armageddon,  the  bat- 
tlefield of  the  nations, — the  place  for  the  ultimate  contest  for 
supremacy  among  the  various  races  and  nations  of  the  earth. 
This  is  the  field  where  every  nation  in  the  world  must  sooner 
or  later  be  brought  to  the  test  and  made  to  battle  for  its  very 
existence.  It  is  a  peaceful  contest,  but  none  the  less  deadly 
on  that  account.  Preparedness  for  this  final  and  ultimate  con- 
flict will  consist  in  the  study  of  standards  of  living  and  in  the 
adoption  of  such  standards  and  habits  as  will  increase  produc- 
tive efficiency  to  the  maximum  and  reduce  the  cost  of  living  to 
the  lowest  point  which  is  consistent  with  maximum  productiv- 
ity. In  the  interest  of  this  form  of  preparedness  it  will  be  well 
for  us  to  ponder  the  advice  of  Pythagoras  to  his  son :  "Choose 
those  habits  which  are  best;  custom  will  make  them  the 
most  agreeable." 

We  may,  as  suggested  above,  exclude  from  our  territory  races 
with  a  cheaper  standard  of  living  than  ours.  Even  this  requires 
a  government  strong  enough  to  guard  its  boundaries  against  this 
form  of  invasion, — peaceful,  but  no  less  deadly  than  military 
invasion.  Without  a  government  strong  and  willing  to  exclude 
races  with  a  cheap  standard,  our  laborers  and  our  farmers 
would  have  to  compete  with  them  on  our  own  soil  and  be  driven 
either  to  sink  to  their  level  or  to  emigrate.  Laborers  and  farm- 
ers, therefore,  have  quite  as  great  need  of  a  strong  territorial 
state  as  has  any  other  class.  But.  as  already  shown,  even  this 
will  not  absolutely  and  throughout  all  future  time  protect  our 
standard  of  living  against  cheap  standards.  It  postpones  the 


THE  BATTLE  OF  THE  STANDARDS  613 

day  of  reckoning  and  gives  us  a  few  years  or  centuries  of  grace 
in  which  to  rationalize  our  standard  of  living  and  prepare  to 
meet,  in  international  trade  and  other  ways,  the  competition  of 
cheap  standards. 

The  time  to  begin  rationalizing  our  standard  of  living.  Seeing 
that  our  people  must  sometime,  in  some  way,  meet  on  the  mar- 
kets of  the  world  the  competition  of  races  with  a  lower  standard 
of  living  than  ours,  wisdom  requires  that  we  begin  at  once  the 
study  of  the  problem  of  efficient  consumption  as  preparation 
against  that  day  of  reckoning.  This  does  not  mean,  of  course, 
that  we  must  ultimately  learn  to  live  on  as  little  as  they ;  but  it 
does  mean  that  we  must  learn  to  consume  such  things  as  to  add 
to  our  productive  capacity  as  much  as  they  cost.  In  other 
words,  it  means  that  if  we  would  survive  that  competition  we 
must  ultimately  eliminate  from  our  consumption  those  expen- 
sive things  that  neither  directly  nor  indirectly  add  to  our 
strength,  intelligence,  alertness,  or  willingness  to  work,  to  plan, 
to  save,  to  invent,  and  to  invest  our  energies  and  our  savings 
wisely.  The  Eighteenth  Amendment  is  doubtless  a  move  in  the 
right  direction  and  will  give  our  people  an  advantage  in  world 
competition,  unless — which  is  not  improbable,  for  we  are  an 
inventive  people — we  straightway  invent  new  forms  of  waste 
to  take  the  place  of  the  old. 

Household  budgets.  One  of  the  first  things  to  do  in  the  popu- 
lar study  of  efficient  consumption  is  to  systematize  our  expendi- 
tures for  consumers'  goods.  Accurate  accounting  is  the  key  to 
all  scientific  business  management,  as  the  business  world  has 
long  known.  It  is  the  key,  likewise,  to  all  sound  farm  manage- 
ment, as  our  farmers  are  beginning  to  learn.  It  is  equally  the 
key  to  all  sound  or  scientific  management  of  the  household.  The 
first  step  toward  a  sound  system  of  household  accounts  is  to 
plan  the  household  budget.  Too  many  people  consume  in  a 
haphazard  and  inefficient  manner  because  they  do  not  plan  in 
advance  what  they  must  have,  but  buy  whatever  is  most  con- 
venient or  most  enticing  at  the  moment  when  they  happen  to 
have  money  to  spend,  or  whatever  is  urged  upon  them  most 


614 


PRINCIPLES  OF  NATIONAL  ECONOMY 


skillfully  by  salesmen.  The  recent  revival  of  the  study  of  home 
economics  which,  as  shown  in  Chapter  I,  was  where  the  study 
of  economics  first  began,  augurs  well  for  the  future.  It  will 
enable  more  and  more  of  our  people  to  become  masters  of  their 
pocketbooks — making  the  pocketbook  do  what  they  plan  that  it 
should  do,  instead  of  being  mastered  by  it,  buying  whatever 
it  tempts  them  to  buy  when  it  is  full  and  only  such  things  as 
it  permits  them  to  buy  when  it  is  nearly  empty.  In  other  words, 
things  will  be  bought  and  consumed  more  and  more  according 
to  an  intelligent  plan  as  expressed  in  a  budget  and  less  and  less 

Y 


c 


Diagram  A 


Diagram  B 


according  to  the  whim  of  the  moment  and  the  immediate  state 
of  the  pocketbook.  The  nation  whose  people  lead  in  this 
kind  of  rational  consumption  need  have  no  fear  of  the  com- 
petition of  races  with  cheap  standards  of  living. 

Nothing  in  excess.  The  old  Greek  maxim  "Nothing  in  ex- 
cess" expresses  in  brief  form  not  only  a  profound  philosophy  of 
life  but  also  a  specific  rule  to  apply  to  the  consumption  of  goods. 
The  law  of  balance  applies  here  with  peculiar  definiteness. 
The  well-known  principle  of  diminishing  utility,  as  explained 
in  a  previous  chapter,  makes  it  certain  that  the  last  units  of 
anything  consumed  in  excess  will  give  a  small  amount  of  sat- 
isfaction to  the  consumer.  This  may  be  illustrated  by  the 
above  diagrams. 

Let  the  amount  spent  for  Commodity  A  by  a  given  consumer 
be  measured  on  the  line  OX  in  Diagram  A  and  for  Commodity  B, 
by  the  same  consumer,  on  the  line  O'X'  in  Diagram  B.  Let  the 
benefit  or  satisfaction  of  consuming  each  commodity  be  meas- 


THE  BATTLE  OF  THE  STANDARDS  615 

ured  on  the  lines  OY  and  O'Y'  in  the  two  diagrams,  the  curves 
YDX  andY'D'X'  representing  the  declining  utility  of  successive 
units  purchased  as  increasing  units  of  money,  say  dimes,  are 
spent  for  each.  If  the  purchaser  spends  so  much  for  Commodity 
A  as  is  represented  by  the  line  OC  and  so  little  for  Commodity 
B  as  is  represented  by  the  line  O'C ' ,  it  is  apparent  that  he  is  not 
spending  his  money  wisely.  If  he  had  saved  the  last  dime  which 
he  spent  for  Commodity  A,  he  would  have  lost  very  little  bene- 
fit or  satisfaction, — only  as  much  as  is  represented  by  the  line 
CD,  or  by  a  very  small  surface  whose  height  is  approximately 
CD.  If  that  dime  were  spent  for  Commodity  B  it  would  give 
him  a  larger  benefit  or  satisfaction,  as  represented  by  the  line 
C'D',  or  by  a  surface  whose  height  is  approximately  line  CD' 
and  whose  base  is  the  same  as  that  of  the  surface  representing 
the  loss  when  a  dime  less  is  spent  on  Commodity  A. 

It  is  scarcely  necessary  to  add  that  wise  consumption  includes 
also  the  elimination  of  injurious  articles  of  consumption  and 
the  cultivation  of  a  liking  for  those  that  are  beneficial. 

COLLATERAL  READING 

MARSHALL,  ALFRED.  Principles  of  Economics  (fifth  edition),  Book  III. 
New  York,  1907. 

WICKSTKKD,  PHILIP.  The  Common  Sense  of  Political  Economy,  Book  I, 
chap,  ii  ;  Book  II,  chap.  iii.  London,  1910. 


PART  VII.    PUBLIC  FINANCE 


CHAPTER  XLVI 
TAXATION 

Classification  of  revenues.  The  government  as  distinct  from 
the  people  has  needs  of  its  own  and  must  have  revenue  out  of 
which  to  supply  those  needs.  There  are  various  sources  of 
public  revenue,  but  in  modern  times  the  chief  source  has  been 
taxation.  Henry  C.  Adams,  in  his  work  on  finance,1  gives  the 
following  classification  of  public  revenue : 

f  Public  domains 

Public  industries 
Direct  revenues  „        .  .  .,^ 

Gratuities  or  gilts,  or  treasure-trove 


PUBLIC 
REVENUE 


Confiscations  and  indemnities 
(  Taxes 
I  Fees 


Derivative  revenues    . 

Assessments 

[  Fines  and  penalties 

f  Sale  of  bonds  or  other  forms  of  commercial 
Anticipatory  revenue-^       credit 

[Treasury  notes 

In  former  times  the  public  domain  was  made  to  supply  a 
large  part  of  the  revenue  for  the  government.  In  fact,  under  the 
feudal  system,  property  in  land  and  something  resembling 
public  office  went  together.  The  king  had  his  own  demesne ; 
so  likewise  did  his  retainers  and  all  members  of  the  nobility. 
The  nobility  formed  the  chief  fighting  class  and  likewise  the 
administrators  of  local  government,  each  deriving  his  income 
from  the  lands  which  were  granted  to  him. 

Public  industries  have  not  figured  very  largely  as  sources  of 
public  revenue,  unless  royalties  from  mines  could  be  put  in  this 
class.  A  number  of  European  cities  have  derived  portions  of 

1  The  Science  of  Finance,  p.  227.    New  York,  1899. 
619 


620  PRINCIPLES  OF  NATIONAL  ECONOMY 

their  revenue  from  their  own  water,  gas,  and  electric-light  plants. 
Gratuities  and  gifts,  as  well  as  treasure-trove,  are  negligible 
sources  nowadays.  Confiscation  and  indemnities  belong  to  a 
lower  state  of  civilization,  where  militancy  and  the  lust  for 
conquest  prevail.  In  all  civilized  governments  taxes  have  be- 
come the  chief  source  of  revenue, —  fees,  assessments,  fines,  and 
penalties  forming  subsidiary  sources. 

What  is  a  tax  ?  A  tax  is  a  compulsory  payment  to  the  gov- 
ernment for  which  the  latter  does  not  return  to  the  individual 
payer  a  commodity  or  a  service.  The  money,  for  example, 
which  one  pays  for  a  postage  stamp  is  not  a  tax ;  it  is  rather  the 
means  for  the  purchase  of  a  service.  Where  a  municipality 
owns  its  own  water  supply  and  charges  water  rates,  these  rates 
are  not  in  any  proper  sense  taxes ;  they  are,  as  in  the  case  of 
the  purchase  of  postage  stamps,  payments  for  service.  The 
same  is  true  of  the  price  paid  for  any  direct  service  which  the 
public  renders. 

To  be  sure,  the  government  renders  general  services  for  all  its 
taxes ;  but  in  the  case  of  a  tax  there  is  no  attempt  to  apportion 
the  payment  exacted  of  the  individual  to  the  benefit  which  he 
as  an  individual  receives.  Doubtless  everyone  receives  some 
advantages  from  the  existence  of  an  army  or  a  navy,  of  courts, 
or  of  policemen  ;  but  his  tax  is  not  of  the  nature  of  a  purchase, 
since  he  must  pay  it  whether  he  thinks  he  is  getting  anything 
in  return  for  it  or  not,  and  the  amount  of  the  tax  bears  no 
relation  whatever  to  what  he  thinks  the  value  of  the  service  of 
the  state  may  be  to  him. 

Some  taxes  are  absolutely  compulsory;  others  are  compul- 
sory only  conditionally.  An  income  tax,  an  inheritance  tax,  or 
a  poll  tax  is  absolutely  compulsory.  The  individual  has  no 
choice  in  the  matter.  An  excise  or  a  tariff  duty  may  be  avoided 
by  avoiding  the  use  of  the  articles  on  which  these  duties  are 
levied.  One  may  avoid  the  excise  duty  on  tobacco,  for  example, 
by  refraining  from  the  use  of  tobacco.  And  yet  when  one  pays 
this  tax,  he  is  not  receiving  from  the  government  a  service,  since 
the  government  did  not  produce  the  tobacco  but  only  charges 


TAXATION  621 

the  manufacturer  or  the  dealer  for  the  privilege  of  manufac- 
turing and  selling. 

So-called  indirect  taxes.  The  taxes  just  described  are  gener- 
ally called  indirect  taxes.  In  case  of  a  tariff  duty,  for  example, 
the  importer  of  the  dutiable  article  pays  the  tax  directly  to  the 
government.  From  his  point  of  view  it  is  just  as  direct  as  any 
tax.  It  is  the  general  theory,  however,  that  the  consumers  of 
the  imported  articles  pay  the  tax  in  the  form  of  higher  prices. 
In  cases  where  that  happens  the  consumers  may  be  said  to  pay 
the  tax  indirectly.  This  is  by  no  means  always  the  case,  how- 
ever, and  it  is  not  always  easy  to  determine  who  does  actually 
pay  the  tariff  duty.  It  is  therefore  doubtful  whether  or  not  the 
term  "indirect  taxation"  should  be  retained  in  economics.  All 
real  taxes  are  direct  in  the  sense  that  those  on  whom  they  are 
levied  pay  their  money  directly  to  the  government.  In  some 
cases,  however,  the  payer  is  able  to  shift  the  tax  to  somebody 
else  by  charging  a  higher  price  for  a  product  or  by  paying  a 
lower  price  to  the  one  from  whom  he  himself  buys  the  product. 
The  manufacturer  of  alcoholic  liquor  pays  his  excise  duty  as 
directly  to  the  government  as  any  other  tax,  but  if  he  charges 
the  consumer  a  higher  price  for  the  liquor,  the  consumer  is  then 
said  to  pay  the  tax  indirectly.  The  manufacturer  may  also  pay 
the  producer  of  the  raw  materials  a  lower  price,  and  in  that 
case  it  is  the  producer  who  pays  the  tax,  in  part  at  least.  If 
the  manufacturer  carries  a  part  of  the  burden  which  he  is  un- 
able to  shift  to  someone  else,  he  himself  bears  that  burden 
directly,  not  indirectly. 

Taxes  and  monopoly  price.  A  common  abuse  of  the  word 
"taxation"  is  to  apply  it  to  monopoly  price  by  saying  that  the 
monopoly  taxes  the  people.  It  is  sufficient  in  a  case  of  this  kind 
to  say  that  the  monopoly  charges  too  high  a  price,  or  a  monop- 
oly price ;  it  does  not  add  anything  to  the  clarity  of  the  discus- 
sion to  bring  in  the  word  utax."  Where  the  monopoly  sells  a 
commodity  or  a  service,  even  though  it  sells  it  above  cost,  the 
individual  gets  what  he  thinks  ought  to  be  the  equivalent  of 
what  he  pays;  otherwise  he  would  not  have  purchased  the 


622  PRINCIPLES  OF  NATIONAL  ECONOMY 

article.  Similarly,  the  government  might,  if  it  chose,  charge 
more  for  postage  stamps  than  the  cost  of  carrying  the  parcels. 
This  would  not  properly  be  called  a  tax ;  the  proper  expression 
would  be  to  say  that  the  government  is  charging  a  high  price. 

Eliminating  compulsion  in  public  business.  Even  where  the 
government  derives  a  part  of  its  revenue  from  a  public  industry, 
the  element  of  compulsion  is  generally  present.  If  the  revenue 
from  the  industry  does  not  pay  the  expenses,  the  industry  can- 
not become  bankrupt  and  its  affairs  be  wound  up  by  legal  pro- 
ceedings. The  government  can  merely  tax  the  people  or  derive 
an  enforced  revenue  from  some  other  source  to  pay  the  deficit ; 
that  is,  it  can  use  its  power  of  compulsion  to  keep  alive  an 
unprofitable  industry,  whereas  an  individual  or  private  corpora- 
tion, lacking  the  power  of  compulsion,  would  have  no  power  to 
keep  its  business  alive. 

Again,  it  will  generally  be  found  that  the  government  exer- 
cises some  compulsion  by  excluding  competitors  from  its  own 
particular  field.  No  one  is  allowed  to  compete  directly  with  the 
Federal  post  office  in  carrying  first-class  mail.  The  govern- 
ment's power  of  compulsion  is  exercised  in  its  own  behalf.  In 
fact,  it  is  doubtful  whether  there  is  a  case  on  record  where  any 
government  has  succeeded  in  doing  anything  well  on  a  purely 
voluntary  basis.  It  has  had  to  use  its  power  of  compulsion  at 
some  point  or  other  in  the  enterprise.  It  has  either  raised  funds 
by  compulsion  or  excluded  competitors  by  compulsion,  has  re- 
pressed opposition  and  criticism  by  compulsion,  or  in  some 
other  way  made  use  of  this  great  advantage  which  it  possesses 
over  all  private  organizations  in  order  to  insure  its  success. 

These  observations  are  made  not  for  the  purpose  of  criticiz- 
ing or  opposing  government  enterprise,  but  merely  in  the  inter- 
est of  truth  and  accuracy.  Government  is  compulsion ;  and 
when  properly  exercised,  compulsion  is  beneficent.  One  of  the 
great  and  really  unsettled  questions,  however,  is  as  to  the  limits 
within  which  compulsion  is  beneficent  and  beyond  which  it 
is  interference. 


TAXATION  623 

Earmarks  of  a  good  revenue  system.  Henry  C.  Adams  gives 
the  following  as  the  marks  of  a  good  revenue  system:  (i)  It 
must  be  adequate  to  the  just  wants  of  the  state.  (2)  It  must 
present  itself  as  a  system  and  not  as  an  aggregation  of  independ- 
ent and  unrelated  acts.  (3)  In  a  federated  government  such  as 
we  have  in  the  United  States  the  revenue  domain  of  one  branch 
of  the  government  should  not  encroach  upon  the  revenue  do- 
main of  another  in  such  a  way  as  to  bring  confusion.  In  other 
words,  there  must  be  harmony  and  balance  between  the  central 
and  local  governments,  between  the  local  governments  them- 
selves, and  between  the  several  organizations  of  local  govern- 
ment. (4)  It  should  provide  for  elasticity  of  the  revenue  at 
the  point  where  elasticity  is  needed ;  that  is,  the  revenue  must 
be  capable  of  increase  and  decrease  whenever  and  wherever 
these  are  needed. 

Double  taxation.  The  second  of  these  is  of  particular  impor- 
tance in  the  United  States  of  America.  Paraphrasing  the  fa- 
mous rule  of  the  Donnybrook  Fair,  we  have  apparently  followed 
the  rule  "Wherever  you  see  a  thing,  tax  it."  This  has  led  to  a 
great  deal  of  confusion, —  to  double  taxation  in  some  cases  and 
to  complete  escape  from  taxation  in  others.  By  double  taxation 
is  meant  taxing  an  individual  or  different  individuals  twice  for 
the  same  thing.  If,  for  example,  a  farmer  owns  a  piece  of  land 
and  also  has  in  his  possession  a  piece  of  paper  called  a  deed  to 
the  land,  and  if  he  is  taxed  once  on  the  land  and  again  on  the 
deed  to  the  land,  this  is  obviously  a  case  of  double  taxation. 
If,  however,  one  farmer  owns  a  piece  of  land  and  another  owns 
a  mortgage  on  it,  the  owner  of  the  mortgage  is  virtually,  if  not 
literally,  a  part  owner  of  the  land.  If,  now,  the  farmer  pays 
taxes  on  the  full  value  of  the  land,  and  the  mortgage  owner 
pays  on  the  full  value  of  the  mortgage,  there  is  an  equally  clear 
case  of  double  taxation.  The  double  tax  really  falls  on  the 
farmer  because,  where  mortgages  are  taxed,  the  interest  rates 
are  made  higher  in  order  to  recoup  the  lender  for  the  tax  which 
he  has  to  pay. 


624  PRINCIPLES  OF  NATIONAL  ECONOMY 

During  the  years  1917  and  1918  our  Federal  government  sold 
large  numbers  of  bonds  bearing  3^  per  cent  interest.  One  of 
the  arguments  was  that,  since  they  were  free  from  taxation,  one 
received  practically  as  much  net  income  as  he  would  receive  on 
taxable  property  yielding  nominally  5  per  cent  but  being  taxed 
iJf  per  cent.  Where  mortgages  are  not  taxed,  the  same  argu- 
ment would  apply  and  would  be  effective.  If  in  one  state  a 
lender  is  compelled  to  pay  a  i^-per-cent  tax  on  his  mortgage, 
and  in  another  state  he  does  not  have  to  pay  any  tax,  if  he  is  an 
honest  man  he  would  as  willingly  lend  at  3^  per  cent  in  the  lat- 
ter state  as  at  5  per  cent  in  the  former.  If  he  is  dishonest,  how- 
ever, he  may  take  his  chances  on  avoiding  taxation  in  the 
former,  and  if  he  succeeds  he  may  receive  his  5  per  cent  net. 
Again,  where  a  corporation  owns  certain  amounts  of  visible 
property,  but  the  shareholders  have  pieces  of  paper  as  evidences 
of  their  ownership  in  undivided  shares  of  this  property,  if  the 
visible  property  is  taxed  and  the  individuals  are  also  taxed  on 
the  pieces  of  paper  which  they  hold  as  evidences  of  ownership, 
the  effect  is  very  much  the  same  as  though  the  farmer  were 
taxed  on  his  farm  and  also  on  the  deed,  which,  like  the  share  in 
a  corporation,  is  only  an  evidence  of  ownership; 

Overlapping  of  tax  systems.  The  third  of  these  marks  of  a 
good  system  is  also  important  in  this  country.  The  conflict  of 
jurisdictions  between  Federal  and  state  governments,  and  be- 
tween the  state  governments  themselves,  has  produced  a  great 
deal  of  confusion  and  also  a  great  deal  of  double  taxation. 
Various  remedies  for  this  situation  have  been  proposed,  among 
others  the  subdivision  of  the  various  sources  of  revenue,  each 
grade  of  government  to  be  allowed  its  own  particular  source. 
The  Federal  government,  for  example,  is  by  the  Constitution 
given  exclusive  right  to  levy  duties  on  imports.  Since  no  state 
or  municipality  is  permitted  to  enter  this  field,  there  is  no  con- 
fusion here.  It  has  also  been  suggested  that  real-estate  taxes 
should  be  left  exclusively  to  the  local  governments, — munici- 
palities, counties,  and  townships.  It  is  thought  by  certain  writers 
that  licenses  and  franchises  also  should  be  left  exclusively 


TAXATION  625 

to  the  local  governments.  Incomes  and  inheritances  would 
seem  to  be  suitable  subjects  for  state  taxation.  Stamp  taxes  of 
various  sorts  must  apparently  be  left  to  the  Federal  government. 

No  very  clear  dividing  line  has  been  generally  agreed  upon 
for  the  separation  of  Federal  from  state  sources  of  revenue. 
Certain  writers  of  high  authority  hold  that  the  income  tax 
should  belong  exclusively  to  the  states  and  that  the  Federal  gov- 
ernment should  keep  out  of  this  field.  Their  views,  however, 
have  not  received  general  public  support.  We  already  have 
duplication  in  this  field ;  that  is,  in  most  of  our  states  we  have 
income  taxes  in  addition  to  the  Federal  income  tax. 

Inelasticity  of  inheritance  taxes.  The  inheritance  tax  is  an 
excellent  source  of  revenue,  being  very  productive ;  but  it 
should,  from  the  nature  of  the  case,  be  a  permanent  tax  not 
often  to  be  changed.  In  the  course  of  a  generation  practically 
every  estate  will  pass  by  inheritance  and  be  taxed.  But  in  any 
given  year  or  decade  only  a  certain  percentage  of  them  will 
pass  by  inheritance  and  be  taxed.  If,  therefore,  the  tax  is 
changed  frequently,  different  estates  will  bear  very  different 
burdens.  If,  during  a  few  years,  a  very  high  inheritance  tax 
prevails,  the  few  estates  that  pass  by  inheritance  during  those 
years  will  bear  a  heavy  burden ;  and  if,  during  another  few 
years,  there  is  a  very  low  tax,  the  estates  which  pass  in  inher- 
itance during  those  years  will  bear  a  very  light  burden. 

An  income  tax,  however,  may  be  changed  frequently  without 
injustice  to  individuals.  Everyone  who  receives  a  taxable  in- 
come is  likely  to  receive  it  every  year.  The  tax  may  be  changed 
every  year  without  showing  any  discrimination  in  favor  of  or 
against  individuals.  This  would  seem  to  make  it  necessary  that 
an  inheritance  tax  should  be  permanent  and  be  the  source  of  a 
considerable  revenue,  but  that  elasticity  should  be  secured  from 
an  income  tax,  which  may  be  changed  frequently  as  occasion 
demands  an  increase  or  decrease  of  public  revenue. 

The  characteristic  form  of  American  taxation,  however,  is 
what  is  known  as  the  general-property  tax.  Nearly  every  state 
in  the  Union  has  had,  either  in  its  constitution  or  on  its  statute 


626  PRINCIPLES  OF  NATIONAL  ECONOMY 

books,  laws  requiring  the  equal  taxation  of  all  forms  of  prop- 
erty. In  many  cases  this  has  worked  to  the  utter  confusion  of 
our  financial  system.  One  result  is  that  visible  property  is 
taxed  and  invisible  property  escapes.  The  farmer's  land  and 
buildings,  live  stock  and  machinery,  can  scarcely  be  hidden, 
and  the-  assessor  finds  them.  Many  of  the  intangible  and  in- 
visible forms  of  property,  however,  are  difficult  to  find  and  can 
frequently  escape  taxation.  Strange  as  it  may  seem,  many 
rural  districts  show  a  larger  percentage  of  personal  property 
and  a  smaller  percentage  of  real  estate  than  most  of  our  cities 
because  much  of  the  farmer's  personal  property  (machinery, 
tools,  etc.)  is  of  a  kind  that  cannot  well  be  hidden.  No  one 
really  believes  that  farmers  own  a  larger  percentage  of  personal 
property  and  a  smaller  percentage  of  real  estate  than  city 
people,  and  yet  the  assessors'  books  indicate  that  they  do. 

Progressive  taxation.  Various  expedients  have  been  adopted 
to  make  taxes  more  just  than  they  are  under  the  crude  general- 
property  tax.  Among  these  laws  one  of  the  most  important  is 
what  is  known  as  the  graduated  or  progressive  tax.  This  may 
apply  either  to  general  property,  to  incomes,  or  to  inheritances. 
The  principle  of  the  progressive  tax  is  that  the  larger  the  sum 
to  be  taxed,  the  higher  the  rate  of  taxation.  To  begin  with, 
even  an  exemption  operates  to  a  slight  extent  as  a  progressive 
tax.  An  income  tax  which  exempts,  let  us  say,  $2000  from  all 
taxation  and  taxes  only  the  excess  above  $2000  is  slightly  pro- 
gressive, even  though  it  is  nominally  proportional.  A  tax  of 
i  per  cent  on  the  excess  over  $2000  would  work  somewhat  as 
follows:  on  $3000  the  tax  would  be  Sio,  which  is  one  third  of 
i  per  cent  on  the  whole  income  ;  on  $4000  the  tax  would  be  $20, 
which  is  one  half  of  i  per  cent  on  the  whole  income ;  on  $6000 
the  tax  would  be  $40,  which  is  two  thirds  of  i  per  cent  on 
the  whole  income. 

A  genuinely  progressive  tax,  however,  proceeds  farther  than 
this.  It  begins,  let  us  say,  with  a  i-per-cent  tax  on  the  excess 
above  $2000,  i  per  cent  more  on  the  excess  above  $10,000, 
i  per  cent  more  on  the  excess  above  $50,000,  and  so  on.  Under 


TAXATION  627 

this  scheme,  then,  the  individual  who  had  an  income  of  $60,000 
a  year  would  pay  i  per  cent  on  $58,000  (the  excess  above 
$2000),  2  per  cent  on  $50,000  (the  excess  above  $10,000),  and 
3  per  cent  on  $10,000  (the  excess  above  $50,000),  making  a 
total  of  $1880.  Whether  the  tax  be  an  income  tax,  an  inherit- 
ance tax,  or  a  tax  on  general  property,  the  principle  of  the 
graduated  scale  is  the  same. 

Canons  of  taxation.  Adam  Smith,  in  his  "Wealth  of  Nations," 
laid  down  what  have  since  his  day  been  called  the  canons  of 
taxation.  They  are  as  follows : 

(i)  The  subjects  of  every  state  ought  to  contribute  towards  the 
support  of  the  government,  as  nearly  as  possible,  in  proportion  to 
their  respective  abilities ;  that  is,  in  proportion  to  the  revenue 
which  they  respectively  enjoy  under  the  protection  of  the  state.  .  .  . 
( 2 )  The  tax  which  each  individual  is  bound  to  pay  ought  to  be  cer- 
tain, and  not  arbitrary.  The  time  of  payment,  the  manner  of  pay- 
ment, the  quantity  to  be  paid,  ought  all  to  be  clear  and  plain,  to  the 
contributor,  and  to  every  other  person.  ...  (3)  Every  tax  ought  to 
be  levied  at  the  time,  or  in  the  manner,  in  which  it  is  most  likely  to  be 
convenient  for  the  contributor  to  pay  it.  ...  (4)  Every  tax  ought 
to  be  so  contrived  as  both  to  take  out  and  to  keep  out  of  the  pockets 
of  the  people  as  little  as  possible  over  and  above  what  it  brings  into 
the  public  treasury  of  the  state.1 

The  first  of  these  canons  relates  to  the  general  question  of 
justice  ;  the  others  are  so  obviously  practical  and  expedient  that 
there  has  never  been  any  serious  discussion  of  them.  A  great 
deal  of  discussion,  however,  has  centered  round  the  first.  Just 
what  is  meant  by  "in  proportion  to  their  respective  abilities" 
has  never  been  definitely  decided.  At  first  thought  it  sounds  as 
though  this  meant  proportional  rather  than  progressive,  or 
graduated,  taxation.  If  we  assume  that  a  man's  ability  is  in 
exact  proportion  to  his  income,  then  obviously  if  he  pays  in 
proportion  to  his  ability  he  must  pay  in  proportion  to  his  in- 
come. But  it  is  contended  that  a  man's  ability  to  pay  increases 
more  than  in  proportion  to  his  income,  and  that  therefore  if  he 

1  Adam  Smith,  The  Wealth  of  Nations,  Vol.  II,  pp.  414-416. 


628  PRINCIPLES  OF  NATIONAL  ECONOMY 

pays  in  proportion  to  his  ability  he  must  pay  a  progressive,  or 
graduated,  tax  on  his  income  or  his  property.  That  there  is 
some  justification  for  this  opinion  is  evidenced  by  the  almost 
universal  practice  of  exempting  a  certain  minimum.  The  indi- 
vidual whose  income  is  barely  able  to  support  him  and  his 
family  may  be  said  literally  to  have  no  ability  to  pay  taxes,  and 
yet  he  has  an  income.  If  this  is  slightly  greater  than  necessary 
to  support  him  and  his  family,  then  he  may  be  said  to  have 
some  ability  to  pay  taxes.  This  obviously  calls  for  a  certain 
degree  of  progression  in  the  way  of  taxation. 

Repressive  taxation.  The  tendency  is  more  and  more  for  ex- 
pert opinion  to  favor  some  sort  of  progressive,  or  graduated, 
taxation  as  more  just  than  proportional  taxation.  Just  how  far 
in  this  direction  we  should  go  is  not  easy  to  determine.  It  is 
never  wise  to  kill  the  goose  that  lays  the  golden  eggs.  Neither 
is  it  ever  wise  to  tax  anyone  so  heavily  as  to  drive  him  out  of 
productive  business.  If  taxes  are  ever  made  so  heavy  upon 
people  who  are  carrying  on  large  enterprises  as  to  discourage 
accumulation,  enterprise,  and  thrift,  the  state  will  be  doing 
itself  an  injury.  Professor  E.  A.  Ross1  has  suggested  a  new 
canon  of  taxation  to  add  to  the  four  which  Adam  Smith  gave 
us :  A  tax  should  be  as  little  repressive  as  possible. 

The  sum  and  substance  of  all  sound  taxation  is  that  the 
taxes  should  be  as  little  burdensome  as  possible.  The  burden 
of  a  tax  is  twofold.  There  is,  in  the  first  place,  the  disadvan- 
tage to  the  payer.  It  is  a  loss  to  him  to  have  to  give  up  his 
revenue.  In  the  second  place,  there  is  the  discouragement 
to  enterprise  which  a  heavy  tax  involves.  This  is  particularly 
disastrous  when  the  government  is  irregular  and  whimsical 
in  its  taxing  moods.  When  producers  never  know  what  to 
expect  from  the  government  and  its  tax  collectors  they  have 
little  inducement  to  enterprise.  Under  such  conditions  there 
will  be  little  wealth  produced  for  the  government  to  tax,  and 
things  are  likely  to  go  from  bad  to  worse. 

111 A  New  Canon  of  Taxation"  (abstract),  Publications  of  the  American 
Economic  Association  (1893),  Vol.  VIII,  pp.  49-50. 


TAXATION  629 

In  case  there  are  undesirable  businesses  which  the  govern- 
ment does  not  care  to  prohibit,  or  undesirable  habits  which 
it  does  not  care  to  suppress,  the  repressive  power  of  taxation 
may  be  used.  Men  may  then  be  made  either  to  pay  for  their 
folly,  or  to  give  it  up  to  avoid  taxation.  In  extreme  cases  com- 
plete suppression  is  doubtless  better  than  mild  repression ;  in 
less  extreme  cases,  such  as  luxurious  consumption,  ostentatious 
dressing,  etc.,  the  mildly  repressive  effect  of  a  tax  is  desirable. 


CHAPTER  XLVII 

THE  SHIFTING  OF  TAXES1 

One  of  the  first  lessons  that  the  student  of  taxation  learns 
is  that  the  payer  of  a  tax  sometimes  shifts  the  burden  in  whole 
or  in  part  onto  someone  else,  thus  relieving  himself,  in  part  at 
least,  of  the  burden.  This  can  come  about  only  in  the  process 
of  buying  and  selling.  The  person  taxed,  in  other  words,  has  no 
means  of  persuading  anyone  else,  as  a  favor  to  himself,  to  assume 
the  burden ;  he  can  only  charge  a  higher  price  for  what  he  has 
to  sell,  or  pay  a  lower  price  for  what  he  buys,  thus  recouping 
himself  for  what  he  has  paid  in  the  form  Of  a  tax.  But  this  mat- 
ter of  raising  the  price  of  what  one  has  to  sell  or  depressing  the 
price  of  what  one  has  to  buy  is  something  which  is  not  so  easily 
done  as  said,  as  anyone  can  convince  himself  by  trying  it.  The 
buyer  of  what  one  has  to  sell  and  the  seller  of  what  one  has  to 
buy  will  have  something  to  say  about  it.  Unless  the  tax  affects 
the  general  conditions  of  the  market  in  a  way  which  favors  the 
payer  of  it,  he  will  not  be  able  to  sell  at  a  higher  or  buy  at  a 
lower  price, — in  other  words,  he  will  not  be  able  to  shift  the  tax. 

The  shifting  of  a  tax  is  the  process  by  which  the  payer  re- 
coups himself  or  gets  from  some  buyer  of  his  product  or  service, 
or  from  some  seller  of  what  he  buys,  a  sum  which  will  partly  or 
wholly  cover  what  he  pays  in  the  form  of  a  tax.  The  one  who 
finally  bears  the  burden  is  said  to  bear  the  incidence  of  the  tax, 
or  the  incidence  is  said  to  be  upon  him.  In  the  present  state  of 
economic  knowledge  it  is  scarcely  worth  while  to  attempt  the 
task  of  locating  the  final  incidence  of  all  kinds  of  taxes.  When 
the  payer  of  a  tax  shifts  it  upon  someone  else  it  is  not  at  all 

1The  substance  of  this  chapter  is  published  in  the  Yale  Review  for 
November,  1896. 

630 


THE  SHIFTING  OF  TAXES  631 

improbable  that  that  person  will,  in  turn,  shift  it  onto  a  third, 
and  so  on.  When  the  process  of  shifting  a  tax  is  once  started,  it 
is  not  easy  to  tell  when  or  where  it  will  stop  or  who  will  bear 
the  final  incidence.  That  such  knowledge  is  greatly  to  be  de- 
sired goes  without  saying.  It  is  a  truism  that  equity  in  taxa- 
tion consists  in  distributing  the  burdens  equitably ;  but  how 
can  this  be  done,  even  in  theory,  unless  we  know  where  the 
burden  will  rest?  As  a  step  in  the  process  of  finding  out 
where  the  incidence  will  rest,  we  may  begin  by  examining  the 
conditions  which  will  permit  a  tax  to  be  shifted. 

A  tax  is  shifted  only  when  it  affects  final  values  and  prices 
so  as  to  enable  the  taxpayer1  to  reimburse  himself  for  the  tax 
at  the  expense  of  someone  else.  The  shifting  of  taxes  forms  a 
special  class  under  the  general  phenomena  of  value2  and  must 
therefore  be  brought  under  the  general  law  of  value  and  price. 
The  first  question  to  arise  is,  Under  what  conditions  will  a 
tax  affect  the  value  of  the  thing  taxed  ;  or,  in  other  words,  bring 
about  such  a  change  in  the  market  and  such  a  modification  of 
values  as  to  furnish  the  taxpayer  an  opportunity  to  shift  the 
burden  upon  someone  else? 

A  tax  is  no  exception  to  the  general  law  that  nothing  can 
change  the  relative  value  of  an  article  without  first  changing 
the  relation  between  demand  and  supply.  In  order  to  raise  the 
price  of  anything  a  tax  must  either  increase  the  demand  or  re- 
duce the  supply,  and  to  reduce  the  price  it  must  either  decrease 
the  demand  or  increase  the  supply.  A  failure  to  appreciate 
fully  the  universality  and  persistency  of  the  law  of  demand  and 
supply  lies  at  the  basis  of  much  incorrect  thinking  on  the  sub- 
ject of  the  shifting  of  taxes.  There  is  a  more  or  less  general 
opinion  that  the  value  of  anything  is  determined  directly  by 

1  For  convenience  the  following  terminology  is  adopted :  The  taxpayer  is 
the  one  who  pays  the  tax  in  the  first  place,  or  the  one  from  whom  the  tax 
collector  receives  it.  The  bearer  of  the  tax  is  the  one  upon  whom  the  burden 
finally  rests.  The  thing  taxed  is  that  upon  which  the  taxpayer's  tax  is  rated, 
or  according  to  which  it  is  estimated.  This  seems  to  be  in  accord  with  Pro- 
fessor Seligman's  idea  as  set  forth  in  the  Political  Science  Quarterly,  Vol.  VII, 
p.  715,  and  also  in  his  "Essays  in  Taxation,"  p.  395. 

2 See  Marshall's  "Principles  of  Economics"  (third  edition),  p.  519. 


632 


PRINCIPLES  OF  NATIONAL  ECONOMY 


what  it  costs,  and  that  as  a  tax  adds  to  the  cost  it  must  there- 
fore be  added  to  the  price.  This  overlooks  the  true  relation  of 
cost  to  value.  The  cost  of  anything  affects  its  value  only  when 
it  puts  a  check  upon  production  and  limits  the  supply.1  When- 
ever an  addition  to  the  cost  will  cause  a  decrease  in  the  supply 
or  an  increase  in  the  demand,  it  will  raise  the  value  of  the 
article  in  question.  But  this  will  not  occur  in  every  case.  It  is 
scarcely  conceivable  that  a  tax  can  increase  the  demand  for  the 
thing  taxed.2  If  it  ever  does  so,  the  instances  must  be  so  rare 
that  we  can  safely  ignore  them.  This  leaves  us  to  the  conclu- 
sion that  a  tax  can  raise  the  price  of  the  thing  taxed  only  when 
it  occasions  a  diminution  in  the  supply. 

Under  what  conditions  will  a  tax  cause  a  diminution  in  the 
supply  of  the  thing  on  which  it  is  levied?  Whenever  it  will 
make  the  production  of  any  part  of  the  existing  supply  a  source 
of  loss  to  the  producer  at  the  existing  price.  The  supply  of 
different  commodities  is  determined  by  wholly  different  factors. 
In  order  to  arrive  at  definite  conclusions  as  to  the  effect  of 
taxation  upon  the  supply  of  different  taxable  things,  it  will  be 
necessary  to  adopt  the  following  classification : 


{Persons  and  incomes 
["  Land  and  natural  agents 
Commodities-; 


Products 


Incapable  of 

reproduction 
Monopoly  products 
Products   of    competi- 
tive industries 


Produced  under 
increasing  re- 
turns 

Produced  under 
diminishing 
returns 


Persons  and  incomes  belong  in  a  class  by  themselves,  since 
they  are  not  commodities.  If  a  capitation  tax  is  shifted  at  all, 
it  must  be  by  affecting  the  price  of  some  commodity  which  is 

1  Cf .  Chapter  XXV,  What  determines  the  Value  of  a  Thing. 

2  But  it  may  increase  the  demand  for  some  other  commodity  by  inducing 
people  to  substitute  it  for  the  thing  taxed.    There  are,  however,  many  general 
and  indefinite  social  effects  of  taxation  which  need  not  be  discussed  under  the 
shifting  of  taxes,  since  they  do  not  give  the  taxpayer  any  special  opportunity 
nor  any  special  advantage  over  the  other  members  of  the  community. 


THE  SHIFTING  OF  TAXES  633 

inseparately  connected  with  personality.  In  other  words,  such 
taxes  cannot  be  shifted  unless  they  either  increase  the  price  of 
labor  or  decrease  the  price  of  the  necessaries  of  life. 

It  is  difficult  to  see  how  a  general  income  tax  could  be 
shifted  at  all,  unless  it  were  made  heavy  enough  to  decrease 
saving  and  reduce  the  rate  of  accumulation.  A  moderate  in- 
come tax  could  not  make  the  possession  of  an  income  undesir- 
able, and  if  it  applied  proportionally  to  all  incomes  it  could 
not  drive  men  from  one  industry  to  another.  If,  however,  it 
applies  only  to  a  special  class  of  incomes,  or  to  those  derived 
from  certain  special  sources,  it  might  drive  some  men  out 
of  certain  occupations.  Wherever  this  results,  the  diminished 
competition  will  enable  those  who  remain  in  these  occupations 
to  earn  more  and  thus  reimburse  themselves,  in  part  at  least, 
for  the  tax.  When,  however,  as  indicated  above,  an  income  tax 
becomes  excessive,  or  when  it  is  so  heavily  graduated  as  to 
reduce  materially  the  free  incomes  of  the  classes  who  do  most 
of  the  saving  and  investing,  it  is  pretty  certain  to  be  shifted, 
in  part  at  least,  in  the  form  of  a  higher  rate  of  interest.  The 
reason  is  simple.  Those  who  ordinarily  do  the  saving  and  in- 
vesting must,  of  course,  do  it  by  consuming  only  a  part  of  their 
incomes  and  investing  the  rest.  If  their  total  incomes  are 
greatly  reduced  by  a  heavy  income  tax,  they  must  invest  less, 
consume  less,  or  both.  If  they  invest  less  the  slower  rate  of 
accumulation  will  make  it  more  difficult  for  new  enterprises 
to  secure  adequate  capital.  The  competition  among  these  en- 
terprises for  the  limited  amount  of  capital  will  invariably  raise 
the  rate  of  interest.  Enterprises  that  formerly  secured  all  the 
capital  they  needed  at  5  or  6  per  cent  are  likely  to  have  to  pay 
7  or  8  per  cent,  or  even  more.  Our  present  heavy  income  taxes 
(1921)  undoubtedly  have  something  to  do  with  high  rates  of 
interest.  The  only  possible  way  to  prevent  a  scarcity  of  in- 
vestment capital  and  a  consequent  rise  in  the  rate  of  interest 
is  for  other  classes  to  become  large  savers  in  the  aggregate, 
thus  supplying  the  investment  funds  cut  off  from  former  sources 
by  the  graduated  income  tax. 


634  PRINCIPLES  OF  NATIONAL  ECONOMY 

A  capitation  tax  necessarily  bears  most  heavily  upon  the 
poorer  classes  and  may,  under  certain  conditions,  enable  thes'e 
classes  to  earn  more  and  thus  escape  a  part  of  its  burden.  For 
example,  if  a  certain  local  community  should  levy  a  heavy 
capitation  tax  it  might  drive  a  certain  number  of  the  laborers 
elsewhere.  If  the  industries  of  the  place  were  localized  the 
scarcity  of  labor  would  enable  the  remaining  laborers  to  earn 
better  wages.  But  the  wider  the  area  over  which  the  tax  is 
levied,  the  more  difficult  it  will  be  to  shift  it.  What  the  effect 
of  capitation  or  income  taxes  will  be  upon  the  price  of  the 
necessaries  of  life  will  depend  on  the  use  that  is  made  of  the 
money  that  is  collected.  The  probability  of  such  taxes'  being 
shifted  by  causing  a  reduction  in  the  cost  of  living  seems  too 
remote  to  call  for  a  detailed  discussion  here. 

Since  land  and  natural  agencies  are  not  the  products  of  in- 
dustry, the  only  way  of  reducing  the  supply  of  these  things  is 
by  causing  the  abandonment  of  some  portion  which  is  already 
in  use  or  by  preventing  the  appropriation  of  some  portion  that 
would  otherwise  be  used.  A  tax  of  less  than  100  per  cent  of 
the  rental  value  could  do  neither  of  these  things.  Since  rent 
is  a  pure  surplus,  no  individual  owner  could  have  any  reason 
for  abandoning  his  property  so  long  as  the  tax  collector  leaves 
him  any  part  of  this  surplus.  Since  such  a  tax  would  make  no 
difference  in  the  amount  of  land  cultivated,  and  would  not 
change  the  factors  which  determine  the  intensity  of  cultivation, 
it  could  not  affect  the  price  of  the  products  of  the  land  nor 
raise  its  rent.  From  the  standpoint  of  the  tenant  a  given  piece 
of  land  would  be  neither  more  nor  less  desirable  on  account  of 
the  tax ;  the  landlord  could  collect  neither  more  nor  less  rent 
and  would  have  to  bear  the  burden  of  the  tax. 

But,  on  the  other  hand,  the  fact  that  the  landlord  must 
bear  the  tax  makes  land  a  less  desirable  kind  of  property  to 
own  after  the  tax  is  levied  than  before.  This  will  so  diminish 
the  demand  for  land  as  property  as  to  reduce  its  selling  value 
and  enable  the  future  purchaser  to  shift  the  future  taxes  upon 
the  present  owner.  In  other  words,  the  latter  must  bear  the 


THE  SHIFTING  OF  TAXES  635 

whole  of  the  future  taxes,  so  far  as  they  can  be  foreseen.1  If  a 
certain  tax  is  levied,  and  it  is  expected  that  it  will  continue  to  be 
levied  indefinitely  in  the  future,  it  will  reduce  the  selling  value  of 
the  land  to  the  amount  of  the  capitalized  value  of  the  tax.  The 
future  owner  will  therefore  be  able  to  buy  it  so  much  cheaper 
that  he  will  realize  as  large  a  percentage  on  his  investment  as 
though  the  tax  had  never  been  levied.  Our  conclusions  are  that 
a  tax  on  the  rental  value  of  land  cannot  reduce  the  supply  and, 
therefore,  cannot  raise  its  rent.  Consequently  the  owner  of  the 
land  at  the  time  the  tax  is  first  levied  cannot  shift  the  burden 
at  all,  but  such  a  tax  will  reduce  the  demand  for  land  as  prop- 
erty and  will  consequently  lower  its  selling  price.  Therefore 
the  subsequent  purchaser  will  be  able  to  shift  the  tax  upon  the 
one  who  owned  the  land  at  the  time  the  tax  was  first  levied. 

If,  however,  the  tax  is  specific,  and  the  land  is  taxed  at  so 
much  an  acre  without  regard  to  its  value,  it  is  almost  certain 
that  some  of  the  poorer  land  will  not  be  worth  the  taxes. 
Where  this  is  the  case  it  will  be  abandoned  and  thrown  out  of 
cultivation.  The  resulting  diminution  in  the  supply  of  the 
products  of  land  will  increase  their  price  and  enable  the  own- 
ers of  the  better  qualities  of  land  to  collect  a  larger  rent. 
They  will  thus  be  able  to  shift  a  portion  of  the  tax  upon  the 
consumers  of  the  products  of  the  land. 

Those  products  of  human  industry  which  cannot  now  be  re- 
produced form  a  small  and  unimportant  class  which  includes 
rare  old  coins,  curios,  and  works  of  art.  A  universal,  or  world- 
wide, tax  would  affect  them  in  precisely  the  same  way  that  it 
would  land ;  but  since  they  are  movable  and  land  is  not,  a  local 
tax  would  affect  them  differently.  A  local  tax  on  such  articles 
would  have  so  little  effect  on  their  general  market  price  that 
the  future  purchaser  could  not  have  the  opportunity  of  escaping 
the  burden  by  shifting  it  upon  the  present  owner. 

The  supply  of  monopoly  products  is  limited  more  or  less 
arbitrarily  by  the  will  of  the  monopoly,  whose  general  tend- 

aSee  Seligman  on  the  "Shifting  and  Incidence  of  Taxation,"  pp.  52-62,  for 
a  historical  and  critical  examination  of  the  theory. 


636  PRINCIPLES  OF  NATIONAL  ECONOMY 

ency  is  to  fix  the  price  of  its  product  at  the  point  that  will 
yield  the  largest  net  return  and  to  limit  the  supply  to  such 
an  amount  as  can  be  sold  at  that  price.  A  tax  on  the  product 
would  necessitate  a  new  calculation  of  expenses  and  profits  and 
a  new  adjustment  of  prices  and  production  to  suit  the  new 
conditions.  The  price  that  had  yielded  the  largest  net  profit 
before  a  tax  was  put  upon  the  product  would  seldom  or  never 
yield  the  largest  net  profit  afterwards.  A  higher  price  and 
smaller  product  would  ordinarily  give  better  results.  Let  us 
suppose  that  a  certain  article  can  be  produced  by  a  monopoly 
at  a  uniform  cost  of  four  cents  a  pound.  At  this  price  2,000,000 
pounds  could  be  sold;  at  four  and  a  half  cents,  1,500,000 
rounds;  at  five  cents,  1,000,000  pounds;  at  five  and  a  half 
^ents,  600,000  pounds ;  at  six  cents,  400,000  pounds ;  and  at 
six  and  a  half  cents,  200,000  pounds.  Clearly  the  monopoly 
would  prefer  to  put  the  price  at  five  cents  and  limit  the  pro- 
duction to  1,000,000  pounds.  But  if  a  tax  of  one-half  cent  a 
pound  were  added  to  the  expense  a  larger  net  profit  would 
remain  if  the  price  were  put  at  five  and  a  half  or  six  cents 
and  the  production  limited  to  600,000  or  400,000  pounds. 
Therefore,  if  a  monopoly  is  taxed  in  proportion  to  its  gross 
product  it  will  shift  the  tax,  in  part  at  least,  by  charging 
higher  prices  for  its  product. 

If  the  monopoly  is  taxed  in  proportion  to  its  net  profits,  or 
if  it  is  taxed  a  lump  sum  regardless  of  either  profits  or  produc- 
tion, it  will  have  to  bear  the  burden  of  the  tax.  In  neither 
case  could  the  monopoly  gain  anything  by  reducing  the  amount 
of  its  production.  Such  a  tax  would  not  change  the  conditions 
which  determine  the  net  profits  of  the  business. 

The  supply  of  commodities  that  are  produced  under  competi- 
tive conditions  is  not  fixed  by  nature  nor  by  the  arbitrary  will 
of  a  monopoly.  The  tendency  is  for  the  supply  to  increase 
until  the  price  falls  to  a  level  with  the  cost  of  producing  the 
most  expensive  increment.  If  the  cost  were  greater  the  produc- 
tion would  be  checked  sooner,  and  there  would  be  a  smaller 
supply,  which  would  command  a  higher  price.  If  the  cost  were 


THE  SHIFTING  OF  TAXES  637 

lower  the  production  would  be  checked  later,  and  there  would 
be  a  larger  supply,  which  would  have  to  sell  at  a  lower  price. 
The  effect  of  a  tax  on  the  production  of  an  article  of  this  class 
would  be  the  same  as  an  addition  to  the  cost  of  production. 
If  the  same  amount  continued  to  be  produced  after  as  before 
the  tax  was  added,  it  would  have  to  sell  at  the  same  price,  and 
some  of  the  more  expensive  increments  would  then  be  produced 
at  a  loss.  But  this  fact  alone  would  make  it  certain  that  some 
of  the  former  producers  would  be  driven  out  of  the  business, 
and  if  it  were  an  industry  of  diminishing  returns1  this  would 
result  in  a  smaller  supply  and  a  higher  price.  Those  who  remain 
in  the  business  and  continue  to  pay  the  tax  would  thus  be  able 
to  shift  a  part  of  the  burden  upon  the  consumers  of  the  article. 
But  if,  on  the  other  hand,  the  tax  were  collected  directly  from 
the  consumer  rather  than  from  the  producer  of  the  article,  it 
would  make  no  material  difference  in  the  distribution  of  the 
burden.  Such  a  tax  would  make  the  article  a  less  desirable 
possession  and  would,  therefore,  diminish  the  demand  for  it. 
This  diminution  in  the  demand  would  lower  the  price  and  shift 
a  part  of  the  burden  back  upon  the  producer.  This  may  be 
illustrated  by  the  diagram  on  page  638 . 

Let  us  suppose  that  the  supply  of  a  certain  article  is  meas- 
ured along  the  line  OA,  and  its  value  and  cost  of  production 
along  the  line  OB.  Let  GC  represent  the  demand  curve  and  EC 
the  cost  curve ;  in  other  words,  let  us  suppose  that  the  price 
that  could  be  had  for  any  definite  supply  of  the  article  is  rep- 
resented by  the  perpendicular  distance  from  the  point  on  OA 
which  marks  the  limit  of  the  supply  to  the  curve  GC,  and  that 
the  perpendicular  distance  from  the  same  point  on  OA  to  the 

1  It  is  quite  conceivable  that  a  tax  on  an  industry  of  increasing  returns 
might  simply  drive  some  of  the  weaker  competitors  out  of  the  business  and 
enable  the  survivors  to  produce  on  a  larger  scale  and,  consequently,  more 
cheaply.  They  might  even  be  able  to  sell  the  product  at  the  original  price, 
being  reimbursed  for  the  tax  by  the  reduction  in  the  cost  of  production.  In 
the  absence,  however,  of  satisfactory  data  this  is  only  a  tentative  conclusion. 
But  where  the  tax  falls  on  only  a  part  of  the  competitors,  as  in  the  case  of  an 
import  duty  on  an  article  that  is  also  produced  at  home  under  the  law  of 
increasing  returns,  the  case  is  clearer.  This  will  be  discussed  later. 


638 


PRINCIPLES  OF  NATIONAL  ECONOMY 


curve  EC  represents  the  cost  of  producing  the  most  expensive 
increment  of  the  supply.  Obviously,  the  tendency  will  be  for 
the  supply  to  increase  to  an  amount  represented  by  OD,  where 
it  would  be  checked,  because  a  further  production  would  in- 
volve a  loss.  When  the  supply  is  represented  by  OD  the  price 
would  be  represented  by  OF.  But  if  a  tax  equal  to  EE'  were 


F  - 


laid  upon  the  production  of  the  article  it  would  have  the  effect 
of  raising  the  cost  curve  from  EC  to  EC' .  This,  in  turn,  would 
have  the  effect  of  checking  production  and  limiting  the  supply 
to  an  amount  represented  by  OD',  and  this  supply  would  sell 
at  a  price  represented  by  OF'.  This  would  shift  a  part  of  the 
tax  upon  the  consumer. 

But  if  the  taxes  were  collected  from  the  consumer,  instead 
of  the  producer,  it  would  lower  the  demand  curve  from  GC  to 
G'C',  check  the  supply  at  OD',  and  reduce  the  price  to  OF". 
This  would  shift  a  part  of  the  tax  back  upon  the  producer.  If, 
however,  the  tax  were  collected  equally  from  the  producer  and 
consumer  the  supply  would  be  reduced  to  OD";  but  the  price 
would  not  be  materially  changed.  We  have  still  to  consider 
the  case  of  a  tax  which  is  collected  upon  an  article  in  some  ad- 


THE  SHIFTING  OF  TAXES  639 

vanced  stage  of  its  production  or  while  it  is  in  the  hands  of  the 
merchant  or  importer.  This  will  be  taken  up  later. 

According  to  the  foregoing  illustration,  only  a  part  of  the 
tax  is  shifted  in  either  case ;  that  is,  whether  it  is  originally 
collected  from  the  consumer  or  from  the  producer,  what  the 
effect  of  the  tax  will  be  upon  the  price  of  the  thing  taxed  de- 
pends upon  two  conditions :  ( i )  the  elasticity  of  the  demand 
for  the  article  and  (2)  the  amount  of  rent  which  its  production 
affords  in  proportion  to  the  cost.  If,  as  is  the  case  with  com- 
modities for  which  there  are  many  substitutes,  the  demand  is 
highly  elastic  it  means  that  a  comparatively  slight  change  in 
the  price  will  occasion  a  considerable  change  in  the  amount 
consumed.  This  gives  the  consumer  a  decided  advantage  in 
the  struggle  to  shift  taxes.  Other  things  being  equal,  the 
consumer  will  bear  a  smaller  share  of  the  burden  when  the 
demand  for  the  thing  taxed  is  elastic  than  when  it  is  inelastic. 
When  the  demand  is  elastic  the  only  condition  upon  which 
he  will  use  the  thing  at  all,  or  in  anything  like  the  usual 
quantities,  is  that  it  shall  cost  him  no  extra  expense.  An 
attempt  to  make  the  consumer  bear  the  burden  of  the  tax  would 
result  in  a  greatly  diminished  consumption.  Consequently  the 
producer  must  either  bear  the  tax  or  go  out  of  business.  But  if 
the  demand  is  inelastic,  as  is  the  case  with  commodities  for 
which  there  are  few  substitutes,  the  producer  has  the  advantage. 
Other  things  being  equal,  the  consumer  will  have  to  bear  a 
larger  share  of  the  tax  than  he  would  if  the  demand  were  elas- 
tic. The  additional  expense  of  the  tax  would  not  occasion  any 
considerable  falling  off  in  the  amount  consumed. 

On  the  other  hand,  the  elasticity  of  the  production  or  the 
supply  depends  upon  the  extent  to  which  rent  enters  into  the 
production  of  the  article  in  question.  If  very  little  rent  is 
afforded,  it  is  because  there  is  very  little  difference  in  the 
cost  of  producing  different  increments  of  the  supply.  If  all 
increments  are  produced  at  about  a  uniform  cost  which  ap- 
proximates very  closely  to  the  market  price,  any  addition  to 


640  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  current  cost  or  any  subtraction  from  the  current  price 
would  occasion  a  considerable  falling  off  in  the  amount  pro- 
duced. Unless  the  producers  could  shift  a  tax  they  would 
stop  producing  rather  than  pay  it.  So  the  consumer  would 
have  to  bear  a  large  share  of  the  tax  or  do  without  the  product. 
But  if  the  production  of  the  article  in  question  affords  a  large 
share  of  rent,  it  is  because  there  is  a  considerable  difference 
in  the  cost  of  producing  different  increments  of  the  supply. 
Where  this  is  the  case  an  addition  to  the  cost  or  a  subtraction 
from  the  price  will  occasion  a  comparatively  small  diminution 
in  the  supply.  The  effects  of  a  tax  would  be  only  to  cause  a 
small  diminution  in  the  supply,  and  the  consumer  would  have 
the  advantage.1  Other  things  being  equal,  the  consumer  will 
bear  a  larger  share  of  the  tax  when  the  production  of  the  thing 
taxed  affords  a  small  amount  of  rent  than  when  it  affords  a 
large  amount.  For  convenience  in  the  following  discussion  let 
us  agree  to  use  the  term  " elasticity  of  production  or  supply" 
to  mean  the  extent  to  which  a  fluctuation  in  the  value  or  the  cost 
of  production  will  affect  the  amount  produced.  Thus  the  pro- 
duction of  a  given  article  is  highly  elastic  when  a  comparatively 
slight  addition  to  the  price  or  subtraction  from  the  cost  will 
occasion  a  considerable  increase  in  the  amount  produced,  and  a 
comparatively  slight  addition  to  the  cost  or  subtraction  from 
the  price  will  occasion  a  considerable  decrease  in  the  amount 
produced.  When  the  opposite  conditions  obtain,  the  produc- 
tion is  inelastic.  Then  we  can  lay  it  down  as  a  general  prin- 
ciple that  the  distribution  of  the  burden  of  any  particular  tax 
on  the  products  of  competitive  industries  depends  upon  the 
comparative  elasticity  of  the  demand  and  the  supply  of  the 
thing  taxed.2  If  the  demand  is  more  elastic  than  the  supply, 
the  consumer  will  bear  a  small  share  of  the  tax ;  but  if  the 

1  The  probabilities  are  that  the  tax  will  come  out  of  the  landlord's  rent. 

2  It  has  seemed  expedient  to  avoid  the  u=e  of  such  terms  as  "  consumer's  rent," 
but  to  those  who  are  familiar  with  that  term  it  will  readily  occur  that  the 
elasticity  of  demand  depends  upon  the  amount  of  the  consumer's  rent  which 
the  commodity  affords,  just  as  the  elasticity  of  supply  depends  upon  the  amount 
of  producer's  rent. 


THE  SHIFTING  OF  TAXES  641 

supply  is  more  elastic  than  the  demand,  the  consumer  will  bear 
a  large  proportion. 

We  are  now  in  a  position  to  consider  the  case  of  a  tax  that 
is  placed  upon  an  article  in  some  advanced  stage  of  its  pro- 
duction or  while  it  is  in  the  hands  of  the  merchant  or  importer 
on  its  way  from  the  producer  to  the  consumer.  These  advanced 
processes  of  production  are  the  ones  which,  in  general,  pro- 
duce the  least  rent  and  are  affected  most  by  changes  in  cost 
or  value.  Therefore  it  is  safe  to  conclude  that  such  taxes  are 
most  certain  to  be  shifted.  The  margin  of  profit  which  mer- 
chants, for  example,  make  upon  a  given  commodity  of  this 
class  is  so  small  and  so  nearly  uniform  that  a  tax  upon  that 
commodity  would  almost  certainly  cause  them  to  stop  handling 
it  unless  they  could  shift  the  tax.  The  question  is,  Will  they 
shift  it  forward  upon  the  consumer  in  the  form  of  a  higher  price 
for  the  finished  product  or  will  they  shift  it  backward  upon 
the  producer  of  the  raw  material  by  paying  him  a  lower  price  ? 
It  is  evident  that  the  burden  will  be  shifted  in  the  direction 
of  the  least  resistance.  If  the  demand  for  the  finished  product 
is  more  elastic  than  the  supply,  the  consumer  has  power  to 
resist  effectively  the  attempt  to  shift  the  burden  upon  him; 
but  if  the  supply  is  more  elastic,  the  producer  has  the  greater 
power  of  resistance.  Therefore  we  conclude  that  the  prin- 
ciple of  the  comparative  elasticity  of  demand  and  supply,  as 
determining  the  distribution  of  the  burden  of  taxation  between 
producer  and  consumer,  applies  to  this  as  well  as  to  other  cases. 

A  tariff  duty  on  imported  commodities  is  no  exception  to  the 
general  rule  that  a  tax  can  affect  the  value  of  the  thing  taxed 
only  when  it  changes  the  relation  of  demand  to  supply.  Since 
a  tariff  duty  could  scarcely  be  expected  to  add  anything  to  the 
demand  for  the  thing  taxed,  we  must  conclude  that  it  must 
diminish  the  supply  in  the  home  market  if  it  is  to  be  added  to 
the  price.  In  other  words,  the  tariff  cannot  be  shifted  upon  the 
home  consumer  unless  th6  effect  of  the  tariff  is  to  reduce  the 
supply  of  the  article  in  the  home  market.  The  question  is, 
Under  what  conditions  will  a  tariff  duty  on  an  imported  com- 


642  PRINCIPLES  OF  NATIONAL  ECONOMY 

modity  occasion  a  diminution  in  the  supply  of  the  article  in 
the  home  market?  Let  us  divide  imported  commodities  into 
the  following  classes  :  (  i  )  those  which  cannot  be  produced  at 
home  at  existing  prices  ;  (  2  )  those  which  are  produced  at  home 
at  existing  prices,  but  whose  production  is  subject  to  the  law 
of  diminishing  returns;  (3)  those  which  are  produced  at  home 
under  the  law  of  increasing  returns. 

Any  commodity  which  is  produced  for  a  world-wide  market 
tends  to  be  distributed  among  different  sections  and  political 
divisions  in  such  proportions  that  the  producer  will  realize  as 
much  net  profit  on  that  portion  which  is  sent  to  one  section  as 
that  which  goes  to  another.  If  at  .a  given  time  a  larger  net 
profit  is  generally  realized  on  what  is  sent  to  one  section  than 
on  what  is  sent  to  another,  manifestly  the  producers,  if  they 
find  it  out,  will  begin  sending  more  to  one  section  and  less  to 
the  other  until  the  price  is  so  reduced  in  the  first  and  increased 
in  the  second  that  the  profits  will  be  equalized.  If  a  certain 
country  levied  an  import  duty  upon  the  commodity  in  ques- 
tion, and  if  its  price  within  that  country  were  to  remain  the 
same  as  before,  it  would  reduce  the  profit  to  the  foreign  pro- 
ducer upon  that  part  of  the  product  which  is  sent  to  that 
country.  Less  would  therefore  be  sent  there  and  more  to  other 
countries  until  the  equilibrium  was  again  restored  by  the  crea- 
tion of  a  new  equilibrium  price  somewhat  higher  than  the  old 
one.  This  diminution  in  the  amount  sent  to  the  tariff  country 
would  raise  the  price  there  unless  the  domestic  product  increased 
sufficiently  to  counterbalance  the  diminution  in  the  amount 
imported.  But  if  it  should  so  happen  that  the  import  duty 
should  occasion  such  an  increase  in  the  domestic  product  as 
to  counterbalance  the  diminution  in  the  amount  imported, 
then  no  rise  in  the  price  would  result,  and  the  home  consumer 
would  not  have  to  bear  the  burden  of  the  duty.1 

Under  what  conditions  will  the  domestic  product  be  increased 
by  the  import  duty  sufficiently  to  counterbalance  the  diminution 


is,  of  course,  overlooks  local  conditions  which   sometimes  exist  on  the 
border  of  the  tariff  country. 


THE  SHIFTING  OF  TAXES  643 

in  the  amount  imported?  The  utility  of  the  above  classi- 
fication will  now  appear.  If  the  duty  is  levied  upon  a  com- 
modity which  cannot  be  produced  at  home  at  the  existing  price, 
manifestly  the  home  production  could  not  increase  sufficiently 
to  keep  the  price  from  rising.  The  only  condition  under  which 
it  can  be  produced  at  home  at  all  is  that  the  price  shall  rise 
sufficiently  to  cover  the  cost  of  producing  it  under  the  unfavor- 
able domestic  conditions.  In  such  a  case  the  whole  of  the  duty 
is  almost  certain  to  be  added  to  the  price.  If  the  commodity 
is  one  which  is  produced  at  home,  but  under  the  law  of 
diminishing  returns,  the  results  will  differ  only  in  degree,  if 
at  all.  The  price  is  certain  to  rise  because  the  amount  im- 
ported will  diminish,  and  the  domestic  product  cannot  mate- 
rially increase  without  a  rise  in  price.1  The  conditions  are 
essentially  the  same  as  those  illustrated  in  the  diagram  on 
page  638.  We  are  safe  in  assuming  that  the  domestic  product 
has  already  increased  as  far  as  it  could  increase  profitably  at 
the  existing  price.  Since  it  is  an  industry  of  diminishing  re- 
turns, a  larger  production  would  involve  a  higher  cost.  Poorer 
land,  poorer  labor,  poor  managing  ability,  or  all  combined  would 
have  to  be  called  into  use,  or  each  existing  establishment  would 
have  to  be  operated  more  extensively  and,  consequently,  at  a 
greater  cost  per  unit  of  product. 

Here,  again,  we  may  apply  the  principle  of  the  comparative 
elasticity  of  demand  and  supply  to  determine  the  extent  to 
which  such  a  tax  would  affect  the  price,  but  it  must  be  applied 
in  a  somewhat  special  manner.  Paradoxical  as  it  may  seem  at 
first,  yet  it  is  true  that  the  more  elasticity  there  is  in  that  part 
of  the  supply  which  is  produced  at  home,  the  less  elastic  will 
be  the  whole  supply.  In  other  words,  the  more  readily  the 
home  production  will  respond  to  a  slight  rise  in  price,  the  less 
an  import  duty  will  affect  the  whole  supply  on  the  home  mar- 
ket. The  reason  is  plain.  If  a  slight  rise  in  the  price  of  the 

llt  is  needless  to  say  that  this  can  apply  only  to  commodities  which  are 
imported  in  commercial  quantities.  It  could  not  apply,  for  example,  to  a  duty 
on  corn  and  pork  in  this  country  ;  wool  might  serve  as  an  example. 


644  PRINCIPLES  OF  NATIONAL  ECONOMY 

article  will  occasion  a  large  increase  in  the  amount  produced 
at  home,  the  home  production  will  come  nearer  to  an  increase 
sufficient  to  offset  the  falling  off  in  the  amount  imported. 
That  is,  the  total  supply  on  the  home  market  will  be  inelastic. 
This  will  give  the  consumer  an  advantage  in  the  matter  of 
shifting  a  tariff  duty.  He  will  likewise  have  an  advantage  if 
the  commodity  is  one  for  which  the  demand  is  elastic. 

If  the  duty  is  levied  upon  a  commodity  which  is  produced  at 
home  under  the  law  of  increasing  returns,  the  result  is  still 
worse  for  the  foreign  producer  and  correspondingly  better  for 
the  home  consumer.  A  diminution  in  the  amount  imported  will 
open  a  larger  market  to  the  home  producer  and  may  enable  him 
to  produce  more  cheaply,  because  on  a  larger  scale.  Where  this 
holds  true  the  increase  in  the  domestic  product  may  be  more 
than  enough  to  counterbalance  the  diminution  in  the  amount 
imported  and  actually  increase  the  total  supply  on  the  home 
market.  In  such  a  case  the  consumer  would  have  to  bear  no 
part  of  the  duty.  There  are  two  possible  exceptions  to  this 
conclusion.  The  first  is  that  an  industry  of  increasing  returns 
always  tends  to  be  a  monopoly.  Where  such  is  the  case  the 
monopoly  will  doubtless  succeed  in  putting  up  the  price  after 
foreign  competition  is  virtually  shut  out  by  the  import  duty. 
But  while  there  is  doubtless  a  tendency  for  industries  of  in- 
creasing returns  to  become  monopolies,  it  can  scarcely  be  main- 
tained that  all  such  industries  are  monopolies.  The  second 
exception  is  that  after  the  import  duty  had  resulted  in  the 
enlargement  of  domestic  industries  and  consequent  cheapened 
production  the  price  might  be  still  further  reduced  by  remov- 
ing the  duty,  and  that  consequently  the  consumers  will  be  shar- 
ing the  burden  of  the  duty  in  that  they  would  buy  the  article 
more  cheaply  if  the  duty  were  removed.  While  this  might  be 
temporarily  true,  it  is  probable  that  the  same  forces  which 
kept  the  price  up  before  the  duty  was  first  levied  would  ul- 
timately bring  about  the  same  conditions  after  the  duty 
had  been  removed, 


CHAPTER  XLVIII 

THE  MINIMUM  SACRIFICE  THEORY  OF  TAXATION1 

If  taxes  were  voluntary  contributions  for  the  support  of  the 
state,  it  would  be  important  that  we  should  recognize  some 
principle  by  which  to  determine  how  much  each  individual 
ought  to  give.  Since  the  payment  of  such  a  tax  and  its  amount 
would  be  matters  for  the  individual  conscience,  it  would  be 
pertinent  to  ask  what  principle  of  obligation  the  individual 
ought  to  adopt  as  his  rule  of  action.  But  since  taxes  are  not 
voluntary  contributions  but  forced  payments,  we  need  to  know 
not  so  much  what  the  social  obligation  of  the  individual  is  as 
what  the  social  obligation  of  the  state  is, — not  how  much  the 
individual  ought  in  harmony  with  his  social  obligation  to  give, 
but  how  much  the  state  ought  in  harmony  with  its  own  obliga- 
tion to  take  from  him  and  under  what  conditions  to  take  it.  In 
the  matter  of  taxation  the  state  alone  is  the  voluntary  agent,  and 
consequently  the  social  obligation  of  the  state  alone  is  to  be  de- 
termined. It  is  one  thing  to  say  that  the  individual  ought  to 
contribute  to  the  support  of  the  state  in  proportion  to  the 
benefit  which  he  receives,  or  to  his  ability  to  pay,  or  to  his 
faculty,  but  it  is  quite  another  thing  to  say  that  the  state  ought 
to  make  him  do  any  of  these  things. 

These  two  questions,  though  distinct,  may  be  resolved  into 
one  by  assuming  that  it  is  the  duty  of  the  state  to  make  its 
citizens  do  whatever  they  ought  in  conscience  to  do.  It  would 
still  be  the  duty  of  the  state  which  would  have  to  be  determined, 
but  under  such  an  assumption  that  duty  would  be  clear  when- 
ever we  had  found  out  how  the  individual  ought  to  act.  Such 

1The  substance  of  this  chapter  was  published  in  the  Political  Science 
Quarterly,  Vol.  XIX,  No.  i  (March,  1904). 

645 


646  PRINCIPLES  OF  NATIONAL  ECONOMY 

was  the  assumption  upon  which  states  acted  in  an  earlier  and 
darker  age,  but  it  has  generally  been  abandoned  except  in  dis- 
cussions of  the  basis  of  taxation,  and  it  is  time  that  it  should 
be  abandoned  even  here. 

It  is  not  necessarily  the  duty  of  the  state  to  make  the  indi- 
vidual do  whatever  he  ought  to  do.  In  many  cases  it  would  cost 
more  than  it  is  worth.  In  some  cases,  of  course,  the  state 
ought  to  make  the  individual  do  whatever  his  duty  requires, 
as  to  refrain  from  violence  and  fraud,  to  pay  a  debt,  or  to 
keep  a  contract.  In  these  cases  it  is  so  important  that  the 
individual  should  do  what  his  duty  requires  as  to  more  than 
pay  the  cost  of  compelling  him  to  do  so.  But  there  are  many 
other  cases  where  the  duty  of  the  state  has  to  be  determined 
on  other  grounds,  largely  because  the  state's,  efforts  at  com- 
pulsion would  do  more  harm  than  allowing  the  individual  to 
ignore  his  duty.  It  may  be  that  each  citizen  ought  to  contrib- 
ute to  the  support  of  the  Church  "according  as  the  Lord  hath 
prospered  him,"  but  none  of  the  more  advanced  nations  would 
think  of  trying  to  compel  him  to  do  so.  It  may  be  the  duty  of 
each  laborer  to  join  a  union,  but  no  state  ought  to  force  him 
into  one, — much  less  ought  the  union  to  be  allowed  to  appro- 
priate that  prerogative  of  sovereignty  to  itself.  It  may  be  and 
very  likely  is  the  duty  of  each  individual  "  to  produce  according 
to  his  ability  and  consume  according  to  his  needs,"  but  no  one 
but  a  socialist  would  claim  that  the  state  ought  to  try  to  make 
him  do  so.  To  succeed  in  this  would  require  omniscience  and 
omnipotence,  and  the  state  possesses  neither.  It  is  obviously 
no  one's  duty  to  try  to  do  that  which  he  is  manifestly  incapable 
of  doing.  This  applies  to  states  as  well  as  to  individuals.  The 
illustrations  might  be  multiplied,  but  enough  has  been  said  to 
show  that  there  are  no  a  priori  reasons  for  assuming  that  be- 
cause the  individual  ought  to  pay  for  the  support  of  the  state 
according  to  his  ability,  for  example,  that  it  is  therefore  the 
state's  duty  to  make  him.  do  so.  All  the  results  of  such  efforts 
at  compulsion  must  be  weighed  in  the  balance  before  deciding 
to  undertake  it. 


THE  MINIMUM  SACRIFICE  THEORY  647 

It  is  not  to  be  inferred  that  the  question  of  taxation  is  entirely 
divorced  from  social  utility.  Neither  is  it  to  be  inferred  that 
there  are  two  kinds  of  social  obligation — one  for  the  individ- 
ual and  the  other  for  the  state — nor  that  the  ultimate  test 
of  social  obligation  is  not  the  same  for  the  one  as  for  the  other. 
A  very  distinct  problem  is  involved  in  the  question  of  the  appor- 
tionment of  taxes ;  namely,  What  ought  the  state  to  do  in  the 
matter  ?  Moreover,  there  is  only  one  kind  of  social  obligation ; 
and  the  same  test  of  action,  whatever  that  test  may  be,  must  be 
applied  in  determining  the  duties  of  both  the  individual  and  the 
state.  But  even  when  a  general  principle  of  obligation  has  been 
agreed  upon,  no  one  is  in  a  position  to  decide  upon  the  specific 
duty  of  either  the  individual  or  the  state  until  he  knows  what 
would  be  the  general  economic  consequences  of  their  various 
possible  acts.  Recognizing  that  each  act  is,  for  his  purposes, 
the  first  link  in  a  chain  of  causation,  he  must  be  able  to  trace 
that  chain  from  its  initial  act  to  its  general  results  before  he 
can  tell  whether  or  not  the  act  in  question  conforms  to  his 
general  principle.  As  applied  to  taxation,  for  example,  he  must 
know  how  the  effort  to  collect  a  certain  tax  will  affect  indus- 
tries and  morals  and  other  social  interests  before  he  can 
say  whether  the  state,  in  levying  the  tax,  would  be  acting  in 
harmony  with  the  general  principle  of  obligation  agreed  upon. 
If,  to  be  more  specific,  he  should  find  that  the  attempt  to  collect 
a  certain  tax  would  discourage  certain  desirable  industries  and 
commendable  enterprises,  that  would  be  at  least  a  partial 
reason  for  condemning  it.  That  is  to  say,  if  the  industry 
which  is  suppressed  meets  the  test  of  the  ethical  principle,  the 
tax  which  suppresses  that  industry  cannot  possibly  meet  the 
same  test. 

Let  us  accept,  for  purposes  of  this  discussion,  the  principle  of 
utility  and  assume  that  the  state,  as  well  as  the  individual, 
ought  to  promote  the  general  welfare — or  the  greatest  good  to 
the  greatest  number.  How  can  the  state  promote  the  general 
welfare  in  the  matter  of  taxation?  In  discussing  its  duty  the 
author  cherishes  no  illusions  as  to  the  nature  of  the  state. 


648  PRINCIPLES  OF  NATIONAL  ECONOMY 

Realizing  that  the  latter  is  merely  an  abstraction — a  con- 
venient name  for  certain  forms  of  joint  action  on  the  part 
of  a  multitude  of  individuals — and  that  it  can  have  no  duties 
separate  and  apart  from  those  of  the  individuals  who  com- 
pose it,  yet  the  duty  of  the  individual  in  imposing,  his  will 
upon  other  individuals  through  legislation  is  so  distinct  from 
his  duty  in  other  matters  that  it  is  much  more  convenient,  and 
fully  as  accurate,  to  speak  of  the  former  class  of  duties  as  if 
they  belonged  to  the  state  itself. 

The  question  of  the  duty  of  the  state  in  matters  of  taxation 
is,  of  course,  to  be  kept  distinct  from  the  question  of  its  duty  in 
the  expenditure  of  revenue  after  it  is  raised.  By  the  expendi- 
ture of  a  given  revenue  the  state  may  in  various  ways  add  posi- 
tively to  the  general  welfare  but  it  may  not  be  so  obvious  how 
it  can  do  this  merely  by  collecting  revenue.  There  are  cer- 
tain ways  of  collecting  revenue  which  are  generally  believed 
— and  no  doubt  correctly — to  promote  well-being  at  least 
in  a  negative  way.  When,  for  example,  a  tax  or  a  license  sup- 
presses or  holds  in  check  an  industry  which  is  regarded  as 
more  or  less  deleterious,  such  a  tax  or  license  meets  the  utili- 
tarian test  and  is  therefore  justified.  Writers  on  taxation 
generally  (even  those  who  uphold  the  benefit  theory  or  the 
faculty  theory)  accept  this  as  a  justification,  even  though  it 
does  not  conform  to  their  special  canon  of  justice.  But  if  the 
general  utilitarian  principle,  or  the  general-welfare  argument, 
can  in  this  special  case  override  their  special  canon,  why  may 
it  not  in  other  cases  as  well  ?  It  is  at  least  an  admission  that 
the  general  utilitarian  test  is  a  mqre  fundamental  one  than  that 
represented  by  their  special  canon.  If  so,  the  more  fundamental 
test  ought  to  be  applied  in  all  cases. 

While,  as  already  suggested,  there  are  certain  taxes  whose  col- 
lection adds  to  the  public  welfare  by  suppressing  undesirable 
industries,  yet,  generally  speaking,  the  collection  of  a  tax  is  in 
itself  an  evil.  It  is  the  cost  which  we  have  to  undergo  for  the 
advantages  which  may  be  secured  by  means  of  the  revenue 
after  it  is  collected.  Since  a  tax  is,  speaking  thus  generally,  an 


THE  MINIMUM  SACRIFICE  THEORY  649 

evil,  a  burden,  a  sacrifice  imposed,  it  is  obvious  that  the  utili- 
tarian principle  requires  that  that  evil,  that  burden,  that  sacri- 
fice, shall  be  as  small  as  possible  in  proportion  to  the  revenue 
secured.  When  the  taxes  are  so  levied  and  collected  as  to  im- 
pose the  minimum  of  sacrifice  and  the  revenue  is  so  expended 
as  to  confer  the  maximum  of  advantage,  or  when  the  surplus 
of  advantage  over  sacrifice,  of  good  over  evil,  is  at  its  maximum, 
the  state  has  fulfilled  its  obligation  completely — it  has  met  the 
utilitarian  test. 

If  it  be  once  admitted  that  the  state's  obligation  in  the  mat- 
ter of  taxation  is  to  be  determined  on  the  basis  of  a  broad  prin- 
ciple of  public  utility,  then  it  is  apparent  that  the  argument  in 
favor  of  either  the  benefit  theory  or  the  faculty  theory  must  be 
reconstructed.  Instead  of  basing  the  argument  upon  the  duty 
of  the  individual,  as  is  usually  done,1  the  upholder  of  either  of 
these  theories  must  show  that  if  the  state  should  apportion 
taxes  according  to  benefits  received,  in  the  one  case,  or  accord- 
ing to  ability  to  contribute,  in  the  other,  such  apportionment 
would  impose  the  least  burden,  all  things  considered.  This  is 
possibly  the  subconscious  basis  of  the  arguments  of  those 
writers  who  have  championed  either  of  these  theories,  but  it 
does  not  seem  to  have  been  explicitly  recognized  by  any  of 
them.  The  champion  of  the  faculty  theory,  for  example,  may 
conceivably  have  reasoned  somewhat  as  follows : 

Major  premise.  The  burdens  of  taxation  ought  to  be  so  dis- 
tributed as  to  involve  the  least  possible  sacrifice  on  the  part  of 
the  community  as  a  whole. 

Minor  premise.  When  each  individual  contributes  in  propor- 
tion to  his  ability,  the  whole  burden  of  taxation  is  most  easily 
borne ;  that  is,  with  the  minimum  of  sacrifice. 

Conclusion.    It  is  the  individual's  duty  so  to  contribute. 

Granting  the  premises,  the  conclusion  follows  as  a  matter  of 
course,  so  far  as  the  individual's  duty  is  concerned ;  but,  as  we 
shall  see  later,  the  minor  premise  is  not  sound  and,  as  we  have 

1  If  such  is  not  the  argument,  then  the  leading  expounders  of  these  theories 
are  at  least  guilty  of  inaccurately  expressing  their  views. 


650  PRINCIPLES  OF  NATIONAL  ECONOMY 

already  seen,  the  conclusion  is  not  conclusive  so  far  as  the  duty 
of  the  state  is  concerned.  For  whatever  might  be  true  if  all 
men  were  willing  to  contribute  according  to  their  ability,  the 
fact  is  that  they  are  not  willing  so  to  do.  Being  unwilling,  they 
will  resort  to  various  methods  of  avoiding  such  contribution. 
The  attempt  of  the  state  to  compel  them  to  contribute  accord- 
ing to  their  ability  will  not  be  without  injurious  results :  it  will 
cause  various  changes  in  the  direction  of  business  enterprise. 
One  of  the  ways  of  avoiding  the  necessity  of  paying  a  tax  is  to 
avoid  the  occasion  which  the  assessor,  acting  under  the  law, 
seizes  upon  as  a  pretext  for  collecting  a  sum  of  money.  If,  for 
example,  the  possession  of  a  certain  kind  of  property  offer  such 
an  occasion,  men  will  tend,  within  certain  limits,  to  avoid  the 
possession  of  that  kind  of  property.  In  so  far  as  men  generally 
try  to  avoid  the  possession  of  such  property  or  to  avoid  the 
other  occasions  for  which  the  assessor  is  on  the  lookout,  in  so 
far,  when  a  new  tax  is  levied,  are  industry  and  enterprise  dis- 
turbed and  forced  to  readjust  themselves  to  the  new  pressure. 
These  disturbances  and  readjustments  may  be  more  or  less  in- 
jurious or  more  or  less  beneficial.  If  some  taxes  are  to  be 
approved  because  they  repress  certain  undesirable  industries, 
others  must,  by  the  same  reasoning,  be  condemned  because  they 
repress  desirable  industries.  Since  almost  every  tax  has  some 
effect  in  determining  the  direction  of  business  enterprise,  it  is 
obvious  that  some  consideration  of  these  results  of  the  state's 
action  must  enter  into  the  determination  of  its  duty.  The  mat- 
ter is  therefore  not  settled  when  we  have  found  out  what  the 
individual  ought  to  do. 

By  an  argument  precisely  similar  to  that  in  favor  of  the 
faculty  theory  of  taxation,  though  somewhat  sounder,  the  social- 
ist could  support  his  claim  that  the  state  ought  to  assume  the 
direction  of  all  industry  and  apportion  to  each  individual  his 
work  and  his  income. 

Major  premise.  The  individual  ought  to  work  for  the  eco- 
nomic welfare  of  the  whole  people. 


THE  MINIMUM  SACRIFICE  THEORY  651 

Minor  premise.  If  each  individual  would  voluntarily  work 
according  to  his  ability  and  consume  according  to  his  needs,  the 
economic  welfare  would  be  promoted  in  the  highest  degree. 

'  Conclusion.    It  is  the  duty  of  every  individual  to  produce 
according  to  his  ability  and  consume  according  to  his  needs. 

Both  the  premises  are  probably  sound,  and  if  so  the  conclu- 
sion follows  as  a  matter  of  course  ;  but,  like  the  former  conten- 
tion, the  argument  is  inconclusive  when  applied  to  the  question 
in  hand,  which  is,  What  ought  the  state  to  do  ?  This  question  is 
complicated  in  both  cases  by  the  fact  that  individuals  are  not 
willing  to  do  what  the  conclusion  points  out  as  their  logical  duty, 
and  that  they  will  therefore  adopt  methods  of  avoiding  such 
necessity  if  the  state  should  attempt  to  impose  it  upon  them. 
Such  an  attempt  would  therefore  produce  unlooked-for  and,  it 
is  generally  conceded,  highly  undesirable  consequences.  All  this 
amounts  to  saying  that  it  is  not  the  duty  of  the  state  to  try  to  do 
anything  which  it  cannot  accomplish  or  in  trying  to  accomplish 
which  it  would  work  mischief.  What  is  here  affirmed  regarding 
the  state  is  equally  true  of  individuals.  It  is,  for  example,  in 
the  opinion  of  the  author,  highly  desirable  that  all  who  read  this 
chapter  should  agree  with  its  conclusions,  but  even  he  does  not 
consider  it  anyone's  duty  to  try  to  force  them  to  do  so — for 
the  simple  and  sole  reason  that  such  an  attempt  could  never 
succeed,  or  that,  if  it  did,  it  would  produce  other  results  more 
undesirable  even  than  disagreement. 

McCulloch  alone  among  the  leading  writers  on  taxation  seems 
to  have  grasped  this  fundamental  truth  when  he  wrote : 

It  would,  no  doubt,  be  in  various  respects  desirable  that  the  in- 
habitants of  a  country  should  contribute  to  the  support  of  its  govern- 
ment in  proportion  to  their  means.  This  is  obviously,  however,  a 
matter  of  secondary  importance.  It  is  the  business  of  the  legislator 
to  look  at  the  practical  influence  of  different  taxes,  and  to  resort  in 
preference  to  those  by  which  the  revenue  may  be  raised  with  the 
least  inconvenience.  Should  the  taxes  least  adverse  to  the  public 
interests  fall  on  the  contributors  according  to  their  respective  abilities, 


652  PRINCIPLES  OF  NATIONAL  ECONOMY 

it  will  be  an  additional  recommendation  in  their  favor.  But  the 
sains  populi  is  in  this,  as  it  should  be  in  every  similar  matter, 'the 
prime  consideration ;  and  the  tax  which  is  best  fitted  to  promote,  or 
least  opposed  to,  this  great  end,  though  it  may  not  press  quite  equally 
on  different  orders  of  society,  is  to  be  preferred  to  a  more  equal  but 
otherwise  less  advantageous  tax. 

.  .  .  The  distinguishing  characteristic  of  the  best  tax  is,  not  that 
it  is  most  nearly  proportioned  to  the  means  of  individuals,  but  that  it 
is  easily  assessed  and  collected,  and  is,  at  the  same  time,  most  con- 
ducive, all  things  considered,  to  the  public  interests.1 

Far  from  ignoring  all  ethical  considerations.,  as  Bastable 
suggests,2  this  is  a  distinct  recognition  of  an  ethical  principle 
more  definite  and  more  fundamental  than  any  which  Bastable 
himself  recognizes  in  his  discussion  or  shows  any  signs  of  being 
aware  of. 

Leaving  out  of  consideration  for  the  present  all  benefits  which 
the  levying  and  collecting  of  a  tax  may  confer,  such  as  the  sup- 
pression of  an  undesirable  industry  or  the  deepening  of  the  tax- 
payer's interest  in  the  affairs  of  the  state,  let  us  turn  our  attention 
to  the  sacrifices  involved.  There  is,  of  course,  to  be  considered 
the  direct  sacrifice  on  the  part  of  him  who  pays  a  tax.  Having 
his  income  curtailed  by  the  amount  of  the  tax,  his  power  to 
consume  wealth  or  to  enjoy  the  use  of  it  is  correspondingly  re- 
duced. This  form  of  sacrifice  is  the  most  prominent  and  has, 
naturally  enough,  generally  appealed  most  strongly  to  writers 
on  taxation.  But  there  is  also  another  form  of  sacrifice  quite 
as  important  and  fully  as  worthy  of  attention.  Any  tax  which 
represses  a  desirable  industry  or  form  of  activity  not  only  im- 
poses a  burden  on  him  who  pays  it  but  also  upon  those  who  are 
deprived  of  the  services  or  the  products  of  the  repressed  indus- 
try. Taxes  should  therefore  be  apportioned  in  such  a  way  as 
to  impose  the  smallest  sum  total  of  sacrifice  of  these  two  kinds. 

While  it  is  essential  that  both  forms  of  sacrifice  should  be 
considered  before  reaching  any  final  conclusion  as  to  the  best 

1  Taxation  and  the  Funding  System,  p.  iq.    London,  1845. 

2  Public  Finance,  p.  314.    London  and  New  York,  1895. 


THE  MINIMUM  SACRIFICE  THEORY  653 

system  of  taxation,  nevertheless  the  preliminary  discussion  may 
be  facilitated  by  first  treating  them  separately.  If  one  were 
to  consider  only  the  first  and  more  direct  form  of  sacrifice,  with 
a  view  to  determining  how  the  total  burden  of  this  kind  could 
be  reduced  to  a  minimum,  he  would  be  driven  to  conclude  in 
favor  of  a  highly  progressive  rate  of  taxation  on  incomes,  with 
a  somewhat  higher  rate  on  incomes  derived  from  more  perma- 
nent sources,  such  as  secure  investments,  than  upon  incomes 
from  insecure  sources,  such  as  salaries.  From  the  gross  income 
which  comes  to  him  in  the  form  of  a  salary  the  recipient  must 
make  certain  deductions  in  the  way  of  insurance  premiums, 
for  example,  to  provide  for  the  future,  before  he  is  on  a  level, 
in  point  of  well-being,  with  one  whose  net  income  comes  to  him 
from  a  permanent  investment.  The  man  with  a  salary  of  five 
thousand  dollars  would  be  no  better  off  than  another  with  an 
income  of  four  thousand  from  a  permanent  investment,  if  the 
former  should  have  to  spend  one  thousand  dollars  of  his  salary 
in  life-insurance  premiums  in  order  to  provide  as  well  for  his 
family  as  the  latter's  family  would  be  provided  for  by  the 
investment  itself.  Under  these  conditions  the  sacrifice  involved 
in  the  payment  of  an  equal  amount  to  the  state  would  be  equal, 
though  the  nominal  incomes  are  unequal. 

Leaving  such  matters  out  of  consideration,  a  highly  progres- 
sive rate  of  taxation  would  be  necessary  in  order  to  secure  the 
minimum  of  sacrifice,  and  for  the  following  reasons.  In  the 
first  place,  a  dollar  is  worth  less,  generally  speaking,  to  a  man 
with  a  large  income  than  to  a  man  with  a  small  income,  and  a 
dollar  taken  from  the  former  imposes  a  smaller  sacrifice  than  a 
dollar  taken  from  the  latter.  Moreover,  if  after  the  first  dollar 
is  taken  from  the  first  man  his  income  is  still  greater  than  that 
of  the  second  man,  the  taking  of  a  second  dollar  will  occasion 
him  less  sacrifice  than  would  the  taking  of  a  first  dollar  from 
the  second  man ;  so  that  if  only  two  dollars  were  to  be  raised 
they  should  both  be  taken  from  the  first  man.  Applying  this 
principle  rigorously  we  should  continue  taxing  the  largest  in- 
come until  it  is  reduced  to  such  a  level  that  the  first  dollar  of 


654  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  remaining  income  is  worth  as  much  to  its  owner  as  the 
first  dollar  of  the  next  largest  income  is  worth  to  its  owner,  and 
then  only  should  we  begin  to  tax  the  latter  at  all.  Then  the  two 
should  be  taxed  until  they  are  reduced  to  a  similar  level  with 
respect  to  the  third  largest,  before  the  third  largest  is  taxed  at 
all,  and  so  on  until  a  sufficient  revenue  is  raised.1 

Such  an  application  of  the  principle  involves  the  assumption 
that  wants  are  equal,  which,  though  obviously  not  true,  approxi- 
mates more  nearly  to  the  truth  than  any  other  working  assump- 
tion that  could  possibly  be  invented.  Since  the  state  must 
collect  a  revenue,  it  must  have  some  definite  assumption  upon 
which  it  can  proceed.  The  question  is  not,  therefore,  whether 
men's  wants  are  equal,  but  whether  there  is  any  rule  of  inequal- 
ity of  wants  upon  which  the  apportionment  of  taxes  could  be 
made  with  a  nearer  approximation  to  the  truth.  If  there  be 
such  a  rule,  it  has  not  yet  been  discovered.  To  assume,  for 
example,  that  the  man  whose  income  is  greater  than  five  thou- 
sand has  correspondingly  greater  wants  than  the  man  whose 
income  is  less  than  five  thousand  would  be  obviously  unsafe, 
because  there  are  even  chances  that  the  opposite  would  be  true. 
Where  the  chances  are  even  on  both  sides  it  is  safer  to  assume 
equality.  Of  a  given  number  of  men  of  the  same  age  and  the 
same  general  standard  of  health  (by  way  of  illustration)  it 
is  obviously  untrue  to  assume  that  they  will  all  live  the 
same  number  of  years,  yet  it  is  nearer  the  truth  to  assume 
that  than  any  other  definite  workable  principle.  Consequently 
the  life-insurance  company  acts  justly  when  it  assumes  that 
they  will  live  the  same  number  of  years  and  apportions  their 
premiums  accordingly. 

This  in  no  way  ignores  the  fact  that  wants  expand  with  the 
opportunity  of  gratifying  them.  This  objection,  however,  could 
only  apply  at  the  time  when  the  tax  was  first  imposed.  At  such 
a  time  it  would  doubtless  be  true  that  the  five-thousandth  dollar 
taken  from  a  man  with  an  income  of  ten  thousand  would  occa- 

1  For  a  fuller  discussion  of  this  point  see  an  article  by  the  author  on  "The 
Ethical  Basis  of  Distribution  and  its  Application  to  Taxation,"  in  the  Annals  of 
the  American  Academy  of  Political  and  Social  Science,  July,  1805. 


THE  MINIMUM  SACRIFICE  THEORY  655 

sion  him  a  greater  sacrifice  than  the  taking  of  the  first  dollar 
from  an  income  of  five  thousand  dollars  would  occasion  its 
owner.  But  the  reasons  for  this  are  twofold.  In  the  first  place, 
by  taxing  the  first  man  so  heavily  the  state  would  be  depriving 
him  of  so  many  things  which  he  was  accustomed  to  enjoying 
that  by  the  time  the  five-thousandth  dollar  was  reached,  the 
taking  of  each  particular  dollar  would  be  keenly  felt.  The  last 
dollar  of  his  remaining  income  would  represent  a  greater  utility 
to  him  than  would  the  last  dollar  of  the  five-thousand-dollar 
income  to  its  owner.  In  the  second  place,  by  taxing  the  second 
man  so  lightly  as  compared  with  his  present  taxes  the  state 
would  be  allowing  him  to  consume  some  things  to  which  he  had 
not  become  accustomed.  The  taking  of  the  particular  dollar 
in  question  would  not  involve  a  very  high  sacrifice,  for  the  rea- 
son that  it  would  deprive  him  only  of  some  enjoyment  which 
had  not  yet  entered  into  his  standard  of  living.  But  both  these 
reasons  would  disappear  after  the  new  tax  had  been  in  operation 
for  a  generation,  or  long  enough  to  bring  the  standards  of  living 
of  the  two  men  to  the  same  level. 

Drastic  as  this  method  of  taxation  would  be,  yet,  the  writer 
contends,  this  is  the  method  which  would  be  logically  forced 
upon  us  if  we  should  adopt  the  utilitarian  test  and  should, 
in  applying  it,  have  regard  only  to  the  direct  sacrifice  on 
the  part  of  those  who  pay  the  taxes,  ignoring  the  indirect  forms 
of  sacrifice  which  a  system  of  taxation  inevitably  imposes. 
John  Stuart  Mill,  who  advocated  equality  of  sacrifice  as  the 
rule  of  justice  in  taxation,  was  guilty  of  faulty  reasoning  on 
this  point,  doubtless  because  he  had  not  made  the  analysis 
which  subsequent. writers  have  made  into  the  nature  of  wants 
and  their  satisfaction.  He  was  too  good  a  utilitarian  to  advo- 
cate equality  of  sacrifice  if  he  did  not  believe  that  it  would  in- 
volve the  least  sacrifice  on  the  whole.  This  is  shown  by  the 
following  quotation,  the  italics  of  which  are  mine. 

For  what  reason  ought  equality  to  be  the  rule  in  matters  of  taxa- 
tion ?  For  the  reason  that  it  ought  to  be  so  in  all  affairs  of  govern- 
ment. As  a  government  ought  to  make  no  distinction  of  persons  or 


656  PRINCIPLES  OF  NATIONAL  ECONOMY 

classes  in  the  strength  of  their  claims  on  it,  whatever  sacrifice  it  re- 
quires from  them  should  be  made  to  bear  as  nearly  as  possible  with 
the  same  pressure  upon  all,  which,  it  must  be  observed,  is  the  mode 
by  which  the  least  sacrifice  is  occasioned  on  the  whole.  If  anyone 
bears  less  than  his  fair  share  of  the  burden,  some  other  person  must 
suffer  more  than  his  share,  and  the  alleviation  to  the  one  is  not, 
cceteris  paribus,  so  great  a  good  to  him  as  the  increased  pressure 
upon  another  is  an  evil.1 

The  last  proposition  in  the  above  quotation  would  be  true 
only  of  persons  whose  incomes  were  approximately  equal.  If 
A's  income  is  twice  as  great  as  B's,  or,  to  state  it  more  accu- 
rately, if  A's  income  were  enough  greater  than  B's  so  that  a 
dollar  is  worth  half  as  much  to  A  as  it  is  to  B,  then  equality  of 
sacrifice  would  be  secured  by  making  A  pay  twice  as  many 
dollars  as  B :  by  collecting  $100,  for  example,  from  A  and  $50 
from  B.  But  the  last  dollar  of  A's  remaining  income  would  still 
be  worth  less  to  A  than  the  last  dollar  of  B's  remaining  income 
is  worth  to  B,  and  the  last  dollar  taken  from  A  would  occasion 
him  less  sacrifice  than  the  last  dollar  taken  from  B  has  occa- 
sioned him.  Then  by  taking  more  than  $100,  say  $110,  from 
A,  and  less  than  $50,  say  $40,  from  B  the  same  revenue  would 
be  raised  with  a  smaller  sum  total  of  sacrifice,  for  the  gain  to  B 
by  this  change  would  be  greater  than  the  loss  to  A.  This 
will  appear  at  once  to  anyone  who  at  all  understands  the  prin- 
ciple of  marginal  utility.  The  only  conclusion  one  can  draw  is 
that  the  smallest  sum  total  of  dissatisfaction  is  secured  not  by 
equality  of  sacrifice  but  by  equality  of  marginal  sacrifice. 
Equality  of  marginal  sacrifice  would  be  secured  by  so  appor- 
tioning taxes  that,  as  a  general  rule,  the  last  dollar  collected 
from  one  man  should  impose  the  same  sacrifice  as  the  last  dollar 
collected  from  any  other  man,  though  the  total  amount  collected 
from  each  man  might  impose  very  unequal  total  sacrifices. 

We  are  now  in  a  position  to  test  the  validity  of  the  minor 
premise  in  the  argument  on  page  651  ;  namely,  if  each  indi- 
vidual would  voluntarily  contribute  in  proportion  to  his  ability, 

1  Principles  of  Political  Economy,  Bk.  V,  chap,  ii,  §  2. 


THE  MINIMUM  SACRIFICE  THEORY  657 

the  whole  burden  of  taxation  could  be  most  easily  borne — 
that  is,  with  the  minimum  of  sacrifice.  If  one's  ability  is 
assumed  to  be  measured  by  one's  income,  real  and  potential, 
and  to  vary  with  that  income,  then  the  minimum  of  sacrifice 
would  not  be  secured  by  each  one's  paying  according  to  his 
ability.  If  the  rich  would  volunteer  to  pay  more  than  in  pro- 
portion to  their  ability,  the  burden  would  be  more  easily  borne 
—that  is,  with  less  sacrifice — than  if  all  should  pay  propor- 
tionally. As  a  statement  of  individual  obligation,  even,  the 
faculty  theory  is  untenable,  unless  modified  and  defined  more 
rigidly  than  has  yet  been  done.  From  the  strictly  utilitarian 
standpoint  the  individual  who  measures  his  obligation  to  society 
by  his  total  inceme  is  less  to  be  commended  than  the  individual 
who  determines  whether  he  has  fulfilled  his  social  obligations 
by  considering  not  how  much  he  has  given  but  how  much  he 
has  left.  The  latter  type  of  individual  is  well  illustrated  by  the 
example  of  that  religious  and  philanthropic  leader  who  found, 
early  in  life,  that  he  could  live  in  comfort  and  maintain  his 
maximum  efficiency  by  the  expenditure  of  a  certain  small  in- 
come. Later  in  life,  as  his  income  increased,  he  continued 
living  on  his  earlier  income,  devoting  all  his  surplus  to  the 
service  of  society.  This  is  mentioned  merely  by  way  of  further 
elucidation  of  the  proposition  that  if  there  were  no  indirect 
consequences  of  the  attempt  to  collect  taxes  the  utilitarian 
test  would  require  an  enormously  high  rate  of  progression  in 
the  apportionment  of  taxes,  and  that  if  the  state  were  able  to 
apportion  and  collect  taxes  on  this  basis  it  would  only  be  making 
individuals  do  what  they  ought  to  do  voluntarily. 

But  there  are  indirect  results,  the  most  important  of  which  is, 
as  already  pointed  out,  the  repression  of  certain  desirable 
industries  and  enterprises.  The  importance  of  this  considera- 
tion becomes  apparent  when  we  reflect  on  the  probable  conse- 
quence of  a  system  of  taxation  so  drastically  progressive  as  that 
suggested  above.  If  a  large  share  of  one's  income  above  a 
certain  sum  should  be  seized  by  the  tax  collector,  it  would  tend 
to  discourage  the  effort  to  increase  one's  income  beyond  that 


658  PRINCIPLES  OF  NATIONAL  ECONOMY 

sum.  In  so  far  as  this  reduced  the  energy  of  the  individual  in 
business  or  professional  life,  the  community  would  be  deprived 
of  his  services.  This  deprivation  would  be  a  burden  on  the 
people,  all  the  more  regrettable  because  it  would  not  enrich  the 
public  treasury  in  the  least.1 

Such  considerations  become  still  more  important  when  we 
come  to  the  discussion  of  various  forms  of  taxation,  especially 
the  taxation  of  various  kinds  of  property.  Since  different  kinds 
of  property  come  into  existence  in  different  ways,  taxes  must 
affect  them  differently.  A  kind  of  property  which  is  produced 
by  labor,  or  comes  into  being  as  the  result  of  enterprise,  may  be 
very  seriously  affected  by  a  tax.  Tax  the  makers  of  it  and  they 
will  be  less  willing  to  make  it.  Tax  the  owners  or  users  of  it 
and  they  will  be  less  willing  to  own  or  to  use  it ;  they  will  there- 
fore pay  less  for  it,  and  thus  discourage  the  makers  of  it  as 
effectively  as  if  the  latter  had  to  pay  the  tax  themselves.  In 
either  case  there  will  be  less  of  that  kind  of  property  made  and 
used,  and  some  members  of  the  community  who  would  other- 
wise have  enjoyed  the  use  of  it  will  now  be  deprived  of  that 
use.  This  is  a  burden  to  them,  and,  moreover,  a  burden  which 
in  no  way  adds  revenue  to  the  state.  Such  a  tax  is  repressive. 
On  the  other  hand,  a  kind  of  property  whose  existence  does  not 
depend  upon  individual  labor  or  enterprise  will  be  less  affected 
by  a  tax.  Tax  the  owner  of  a  piece  of  land  and,  while  you  make 
him  less  anxious  to  own  it,  you  will  not  cause  him  to  abandon 
it.  While  you  lower  its  price,  you  do  not  reduce  the  amount  of 
land  nor  deprive  the  community  of  the  use  and  enjoyment  of 
anything  which  it  would  otherwise  have  had.  Such  a  tax  is 
not  repressive. 

As  a  general  proposition  it  is  safe  to  say  that,  other  things  be- 
ing equal,  a  tax  which  represses  desirable  enterprises  or  activi- 
ties, and  thus  deprives  the  community  of  the  use  and  enjoyment 
of  certain  desirable  goods,  is  more  burdensome  in  proportion  to 

!See  also  Ross,  "A  New  Canon  of  Taxation,"  Political  Science  Quarterly, 
Vol.  VII,  p.  585. 


THE  MINIMUM  SACRIFICE  THEORY  659 

the  revenue  raised  than  a  tax  which  does  not  entail  such  results ; 
in  other  words,  a  repressive  tax  is  more  burdensome  than  a 
nonrepressive  tax.  A  proposition  much  more  to  the  point  is 
that  a  tax  on  any  form  of  property  or  income  which  comes  into 
being  as  the  result  of  the  productive  industry  or  enterprise 
of  its  owner  is  more  repressive  than  a  tax  on  any  form  of 
property  or  income  which  does  not  so  come  into  being.  By 
productive  industry  and  enterprise  is  meant  such  industry  and 
enterprise  as  adds  something  in  the  way  of  utility  to  the  com- 
munity and  not  such  as  merely  costs  something  to  its  possessor. 
Skill  in  buying  land  may  cost  as  much  study  and  care  as  skill 
in  making  shoes ;  but  whereas  those  who  exercise  the  latter 
kind  of  skill  increase  the  number  of  shoes,  it  has  never  been 
shown  that  those  who  exercise  the  former  kind  add  anything 
whatever  to  the  community's  stock  of  useful  goods.  Tax  shoe 
factories  and,  in  so  far  as  it  represses  the  industry,  the  com- 
munity will  have  fewer  shoes ;  tax  the  land  and  the  community 
will  not  have  less  of  anything  than  it  would  have  without  the 
tax.  What  is  said  of  a  tax  on  land  could  also  be  said,  within 
limits,  of  a  tax  on  inheritances.  From  the  standpoint  of  non- 
repressive  taxation,  therefore,  both  the  land  tax  and  the  inherit- 
ance tax  have  much  to  be  said  in  their  favor. 

Anyone  who  is  familiar  with  the  subject  of  the  shifting  and 
incidence  of  taxation  will  see  at  once  that  there  is  a  close  con- 
nection between  the  repressive  effects  of  a  tax  and  the  shifting 
of  it.  A  tax  can  be  shifted,  generally  speaking,  only  when  it 
affects  the  demand  for  or  the  supply  of,  and  consequently  the 
value  of,  the  thing  taxed.  The  more  easily  a  tax  affects  the 
supply  or  demand,  the  more  easily  it  is  shifted.  One  which 
does  either  of  these  things  is  repressive :  it  affects  supply  by 
repressing  production ;  it  affects  demand  by  repressing  con- 
sumption. A  careful  analysis  of  the  conditions  under  which 
taxes  may  be  shifted  is,  therefore,  very  much  to  be  desired.1 

1For  an  attempt  in  this  direction  see  the  author's  article  on  "The  Shifting 
of  Taxes,"  Yale  Review,  1896.  See  also  Seligman's  "Shifting  and  Incidence  of 
Taxation"  for  a  brilliant  survey  of  the  earlier  attempts. 


660  PRINCIPLES  OF  NATIONAL  ECONOMY 

Such  an  analysis  would  enable  us  to  form  conclusions  as  to  the 
repressive  or  nonrepressive  effects  of  various  taxes. 

As  applied  to  incomes  in  general,  without  regard  to  their 
source,  a  progressive,  even  a  highly  progressive,,  tax  will  occa- 
sion, on  the  whole,  less  direct  sacrifice  to  the  taxpayers  than  a 
proportional  tax.  A  progressive  tax  is  therefore  to  be  com- 
mended, unless  the  rate  of  progression  is  made  so  high  as  to 
discourage  the  receivers  of  large  incomes  from  trying  to  in- 
crease them.  If  the  rate  of  progression  is  as  high  as  this,  the 
indirect  form  of  sacrifice,  growing  out  of  the  repressive  effects 
of  the  tax,  will  counteract,  wholly  or  in  part,  the  reduction  in 
the  direct  form  of  sacrifice.  A  moderately  progressive  income 
tax  would,  therefore,  seem  to  be  more  desirable  than  a  propor- 
tional one.  But  as  between  different  kinds  of  income  and 
different  kinds  of  property,  the  preference  should  be  given  to 
those  taxes  which  fall  upon  natural  products,  such  as  land, 
rather  than  upon  artificially  produced  goods,  and  upon  in- 
crements of  wealth  which  come  to  an  individual  through  natural 
causes  over  which  he  has  no  control — inheritances,  for  instance 
—rather  than  upon  incomes  earned  by  the  individuals  them- 
selves. Such  taxes  are  less  repressive  than  most  other  special 
forms  of  taxation  and  therefore  occasion  less  sacrifice  of  the 
indirect  kind. 


CHAPTER  XLIX 

THE  FINANCING  OF  A  WAR 

It  is  sincerely  to  be  hoped  that  it  will  never  be  necessary  to 
finance  another  war  and  that  this  chapter  will  therefore  have 
nothing  more  than  an  academic  interest;  but  until  we  have 
reasonable  assurance  that  wars  shall  be  no  more,  the  problem 
of  financing  a  war  must  have  a  very  practical  interest. 

What  is  meant  by  the  financing  of  a  war.  By  the^  financing 
of  a  war  is  meant  the  keeping  of  the  National  Treasury  sup- 
plied with  money  with  which  to  purchase  military  supplies  and 
pay  other  war  expenses.  This  problem  should  be  kept  distinct 
from  the  physical  problem  of  producing  supplies  and  war  mate- 
rials. The  latter  is  a  problem  not  for  the  financial  expert  but 
rather  for  the  industrial  engineer,  the  business  manager,  or 
some  other  expert  in  the  organization  and  coordination  of  the 
factors  of  physical  production.  While  the  financial  problem  is 
one  of  tremendous  importance,  it  is  not  only  less  important 
but  also  very  much  less  difficult  than  that  of  producing  the 
supplies  themselves. 

Financial  problems  less  difficult  than  problems  of  production. 
Difficult  as  is  the  financial  problem,  all  the  factors  are  within 
the  control  of  the  government,  or  at  least  of  the  people  behind 
the  government.  Consequently,  if  they  fail  in  their  attempts 
to  handle  the  problem  they  have  only  themselves  to  blame ; 
their  failure  cannot  be  laid  to  the  physical  difficulties  or  to  fac- 
tors which  lie  beyond  their  own  control.  In  short,  the  failure 
will  be  due  to  the  stupidity  of  their  rulers  or  of  the  people  who 
refuse  to  support  a  sound  financial  policy  on  the  part  of  the 
rulers.  The  problem  of  producing  supplies,  on  the  other  hand, 
especially  on  the  part  of  a  beleaguered  country,  may  depend 
upon  factors  which  lie '  beyond  the  control  of  either  govern- 

66 1 


662  PRINCIPLES  OF  NATIONAL  ECONOMY 

ment  or  people.  For  example,  the  difficulties  of  the  South 
during  the  Civil  War  wefe  on  the  physical  side  insuperable, 
hemmed  in,  as  they  were,  by  blockading  fleets  and  invading 
armies.  On  the  financial  side,  however,  their  difficulties  were 
of  their  own  creation.  In  other  words,  the  difficulties  in  the 
way  of  supplying  themselves  with  horses,  salt,  nitrogen,  and  a 
number  of  other  necessaries  were  insuperable,  but  the  difficul- 
ties which  they,  as  well  as  the  Northern  people,  had  in  finding 
money  with  which  to  pay  for  such  supplies  as  they  could  get 
were  within  their  own  control. 

In  most  of  our  discussions  of  the  problems  of  war  finance 
too  little  attention  is  given  to  certain  large  elementary  prin- 
ciples. The  practical  financiers  are  fully  absorbed  with  the 
details  of  the  question,  and  the  financial  writers  in  the  ephem- 
eral press  are  more  concerned  with  finding  out  what  the  people 
want  them  to  say,  and  then  saying  it,  than  they  are  in  getting 
at  the  root  of  the  problem. 

Speeding  up  the  circulation  of  money.  One  large  economic 
fact  which  greatly  simplifies  the  financing  of  a  war  is  that  an 
increase  in  the  rapidity  of  the  circulation  of  money  has,  in  all 
essential  particulars,  the  same  effect  as  an  increase  in  the  physi- 
cal quantity  of  money.  To  double  the  speed  of  circulation,  for 
example,  enables  a  given  quantity  of  money  to  do  twice  as  much 
work.  Analogies,  though  often  dangerous,  are  sometimes  use- 
ful. A  helpful  one  is  found  between  the  circulation  of  blood 
in  the  human  system  and  the  circulation  of  money  in  the 
country.  When  increased  muscular  exertion  calls  for  larger 
supplies  of  blood  in  the  limbs,  it  is  not  necessary  to  increase 
the  total  volume — the  need  is  met  by  speeding  up  the  circu- 
lation. But  in  order  that  the  heart  may  send  increasing  quan- 
tities of  blood  per  unit  of  time  to  those  parts  where  it  is 
demanded,  it  must  have  means  of  getting  increased  quantities 
per  unit  of  time  back  again  from  the  extremities;  in  other 
words,  the  problem  of  getting  the  blood  back  is  obviously  as 
important  as  that  of  pumping  it  out  to  the  places  where  it  is 
needed.  The  National  Treasury  is  confronted  by  a  similar 


THE  FINANCING  OF  A  WAR  663 

problem  in  time  of  war.  It  is  called  upon  to  send  out  money 
in  increasing  quantities  to  pay  the  enormously  increased  ex- 
penses of  the  government.  In  order  that  it  may  always  have 
sufficient  money  to  pay  out  for  war  supplies  at  an  extraordinary 
rate,  it  must  find  means  of  recovering  it  at  the  same  extraordi- 
nary rate.  Since  all  the  money  not  actually  in  the  Treasury  is 
in  the  hands  of  the  people,  it  is  they  who  must  be  induced  to  re- 
turn it  to  the  Treasury  at  this  extraordinary  rate.  If  the  rulers 
can  devise  a  plan  for  doing  this,  and  if  the  people  are  sufficiently 
wise,  devoted,  and  loyal  to  support  the  plan,  there  will  be  no  dif- 
ficulty in  the  financing  of  a  war.  These  are  two  very  large  ifs. 

More  money  not  absolutely  necessary.  Another  large  fact  of 
even  greater  importance  is  that  the  country,  as  distinct  from 
its  government,  does  not  need  very  much  more  money  in  time 
of  war  than  in  time  of  peace,  except  for  the  purchase  of  foreign 
supplies.  So  far  as  its  domestic  economy  is  concerned,  it  needs 
only  a  little  more.  There  are  not  many  more  men  to  be  hired ; 
there  is  not  much  more  work  which  can  be  done,  because  there 
are  not  many  more  men  to  do  it ;  and  there  are  not  many  more 
goods  to  be  bought  in  time  of  war  than  in  time  of  peace.  The 
difference  is  that  the  government,  instead  of  private  individuals, 
must  hire  the  men  and  buy  the  goods.  This  makes  it  physically 
necessary  that  private  individuals  should  hire  fewer  men  and 
buy  fewer  goods. 

Private  consumption  must  be  cut  down.  For  example,  when 
I  am  spending  my  income  in  time  of  peace  I  am  merely  hiring 
men  to  make  things  for  my  consumption  and  to  wait  upon  me. 
All  the  men  in  the  country  are  presumably  engaged  in  produc- 
ing things  for  consumers  and  in  waiting  upon  them ;  that  is, 
upon  one  another.  In  time  of  war  it  is  necessary  that  a  large 
number  of  men  stop  producing  things  for  private  consumption 
and  waiting  upon  one  another  as  private  consumers,  and  begin 
to  produce  things  for  the  government  and  to  wait  upon  the  gov- 
ernment and  serve  it  as  soldiers.  It  is  physically  impossible 
for  them  to  do  this  unless  private  consumers  are  willing  to  con- 
sume less  and  to  wait  upon  themselves  instead  of  hiring  others 


664  PRINCIPLES  OF  NATIONAL  ECONOMY 

to  do  so.  Moreover,  it  need  not  take  any  more  money  to  hire 
these  men  to  work  for  the  government  than  to  hire  them  to 
work  for  private  consumers. 

If,  for  example,  I  am  spending  so  much  on  myself  that  it 
takes,  in  the  aggregate,  ten  men  to  make  things  for  my  con- 
sumption and  to  wait  upon  me,  it  will  be  necessary  in  time  of 
war  for  me  to  live  on  less,  because  the  government  must  have 
some  of  these  ten  men.  Another  way  of  expressing  the  same 
thing  would  be  to  say  that  I  need  them  to  work  for  me  in 
another  capacity  in  time  of  war ;  I  need  them  to  produce  war 
supplies  and  to  fight  in  my  defense.  The  government  is  my 
agent  in  hiring  these  men  and  directing  the  fighting ;  therefore 
I  must  turn  a  part  of  my  income  over  to  my  agent,  the  govern- 
ment, to  hire  some  of  these  ten  men,  while  I,  with  the  remainder 
of  my  income,  may  hire  the  rest  to  continue  working  for  me. 
What  has  just  been  said  in  the  first  person  singular  can  be 
repeated  in  the  first  person  plural,  and  thus  it  will  include  us  all. 

The  private  consumer  bids  against  the  government  for  man 
power.  If  we  are  all  left  undisturbed  in  the  enjoyment  of  our 
income  and  continue  spending  it  in  such  a  way  as  to  require  as 
many  men  as  before  to  produce  for  and  to  wait  upon  each  of 
us,  while  our  agent,  the  government,  without  taxing  us,  under- 
takes to  find  means  to  hire  the  men  whom  it  needs,  we  shall— 
each  and  every  one — be  competing  for  these  men  against  our 
own  agent,  the  government.  If  the  government  opens  a  war 
chest  or  gets  its  money  from  another  source  than  our  incomes, 
it  will  have  to  bid  against  us  to  get  men  to  work  and  fight  for 
it.  Literally,  it  will  be  trying  with  a  lot  of  new  money  to  hire 
them  away  from  us,  while  we  are  trying  with  our  full  income 
to  hire  them  away  from  the  government  and  keep  them  work- 
ing for  us.  Aside  from  the  obvious  futility  and  stupidity  of 
this  process,  it  results  in  inflation  of  prices,  no  matter  what  the 
source  of  the  government's  money  may  be. 

Taxation  enforces  economy  in  private  consumption.  Here  is 
the  first  great  mistake  which  almost  every  government  has 
made,  up  to  the  present  time,  in  its  efforts  to  finance  a  war :  it 


THE  FINANCING  OF  A  WAR  665 

has  hesitated  to  tax  its  people.  The  only  sound  method  of 
financing  a  war  is  to  tax  the  people — and  tax  them  to  the  bone. 
Unless  the  government  has  a  war  chest  which  it  can  open  or 
unless  it  issues  a  lot  of  new  currency,  it  must  get  its  money 
from  its  citizens,  in  the  form  either  of  loans  or  of  taxes.  If  it 
does  not  do  one  of  these  things,  there  is  no  possibility  of  avoid- 
ing that  conflict  which  has  just  been  described.  Leaving  the 
people  with  their  incomes  and  purchasing  power  unimpaired 
will  permit  them  to  continue  spending  their  incomes  as  be- 
fore, and  this  expenditure  is  a  demand  for  men  to  produce 
supplies  for  private  consumption  and  to  wait  upon  the  con- 
sumers. The  only  way,  then,  in  which  the  government  can 
get  these  men  is  to  outbid  with  its  new  money  the  private  con- 
sumers. This  competition  between  the  private  consumers  and 
the  government  for  men  and  supplies  cannot  by  any  possibility 
result  in  anything  else  than  an  inflation  of  prices. 

Issuing  new  money  a  mistake.  Even  when  the  government 
has  accumulated  a  war  chest  of  specie,  this  money  will  be  used 
to  outbid  private  consumers  for  men  and  supplies,  which  will 
result  in  an  inflation  of  prices.  Where  the  government  issues 
or  causes  to  be  issued  a  lot  of  new  credit  currency,  in  order  to 
avoid  taxation,  the  difficulty  is  exaggerated,  for  there  is  not 
only  an  inflation  but  a  grave  danger  of  depreciation. 

Contrary  to  a  very  widely  accepted  theory,  there  may  be  an 
inflation  without  any  use  whatever  of  credit  currency.  This  is 
possible,  for  example,  where  a  large  quantity  of  standard  coin, 
or  metallic  money,  is  injected  into  the  circulation  after  having 
been  hoarded  in  the  public  treasury.  The  way  it  gets  into  cir- 
culation at  the  beginning  of  a  war  is  through  its  use  by  the 
government  in  purchasing  supplies  and  hiring  men ;  all  the 
private  individuals,  with  their  incomes  unaffected,  continue 
purchasing  supplies  and  hiring  men  as  before;  and  it  is  this 
competition  of  the  government,  with  its  new  money,  against 
private  consumers,  with  their  old  money,  that  starts  prices 
upward  and  causes  inflation.  It  makes  very  little  difference 
whether  the  new  money  which  the  government  uses  in  these 


666  PRINCIPLES  OF  NATIONAL  ECONOMY 

purchases  is  coin  which  has  been  hoarded  or  credit  currency 
which  is  issued  for  a  special  purpose,  except  where  the  latter  be- 
comes so  excessive  in  quantity  as  to  depreciate  in  terms  of  coin. 

Individuals  must  purchase  less  if  the  government  is  to  pur- 
chase more.  The  first  and  fundamental  conclusion,  therefore, 
is  that  in  order  to  avoid  inflation  the  people  must  purchase  less 
in  proportion  as  the  government  purchases  more.  The  only 
way  to  force  them  to  purchase  less  is  to  get  their  money  away 
from  them.  This  may  be  done  by  several  methods  as  follows : 

The  first  method  is  that  of  voluntary  loans  of  cash.  People 
who  have  been  spending  their  money  for  other  things  may  be 
induced  to  spend  it  for  government  bonds.  They  must  then 
cut  down  their  purchases  of  supplies.  This  reduces  the  demand 
for  men  to  produce  supplies  for  private  individuals.  These 
men  who  are  released  from  general  industry  are  then  available 
to  be  hired  by  the  money  which  is  now  in  the  hands  of  the 
government.  This  cannot  result  in  inflation  except  where  the 
government  bonds  are  used  as  a  basis  of  credit.  In  this  case, 
the  purchaser  of  a  government  bond,  having  lent  his  money 
to  the  government,  then  turns  around  and  buys  on  credit, 
using  his  bond  as  security.  This  results  in  inflation. 

Another  method  is  that  of  forced  loans, — the  commandeering 
of  the  supplies  of  money  in  savings  banks  and  other  places  of 
deposit.  This  is  virtually  the  system  of  conscription  as  applied 
to  money.  Whatever  else  may  be  said  against  this  method, 
it  cannot  be  said  to  result  in  inflation,  because  the  people 
whose  money  is  taken  away  have  less  to  spend  and  therefore 
they  do  not  compete  with  the  government  in  hiring  men  and 
buying  supplies. 

Still  another  method,  and  the  one  which  ought  always  to  be 
followed  as  far  as  possible,  is  that  of  taxation.  This  is  likewise 
a  system  of  conscription, — the  conscription  of  incomes  as  dis- 
tinguished from  that  of  men.  It  is  better  than  the  forced  loan 
because  it  applies  to  all  incomes  and  does  not  penalize  those 
who  have  shown  sufficient  frugality  and  thrift  to  save  and 
deposit  a  part  of  their  income  instead  of  consuming  it  all. 


THE  FINANCING  OF  A  WAR  667 

The  most  futile  of  all  methods  is  that  of  issuing  temporary 
credit  currency,  to  be  repaid  out  of  war  indemnities  after  a 
victory.  There  is,  however,  one  condition  under  which  it  may 
be  necessary  for  the  government  to  have  available,  in  the  form 
either  of  a  war  chest  or  of  a  credit  currency,  a  new  supply  of 
money.  It  usually  takes  some  months  to  get  the  taxing  ma- 
chinery going  so  as  to  increase  the  government's  income  mate- 
rially. It  may  be  necessary,  in  order  to  tide  over  these  few 
months,  to  make  use  of  some  extraordinary  reservoir  of  cur- 
rency. Usually,  however,  and  always  if  the  credit  of  the  gov- 
ernment is  good,  the  large  sums  needed  at  the  beginning  of  a 
war  can  be  secured  quickly  by  means  of  voluntary  loans.  This 
is  the  first  and  greatest  argument  in  favor  of  raising  money  by 
loans  rather  than  by  taxation. 

Distributing  the  burdens  of  war  over  several  generations. 
Another  argument  is  that  by  borrowing  the  money  the  financial 
burdens  of  the  war  may  be  distributed  over  a  longer  period 
than  if  the  money  is  raised  by  taxation.  It  is  sometimes  said, 
rather  shamelessly  it  is  true,  that  the  people  have  burdens 
enough  in  time  of  war  without  having  to  pay  extraordinary 
taxes.  The  fact  is,  however,  that  those  who  do  not  go  as 
soldiers  or  give  their  services  directly  to  the  government  bear 
no  burdens  whatever  except  taxes.  Most  of  them,  in  fact,  pros- 
per in  time  of  war.  Many  a  respectable  family  is  still  living  on 
wealth  accumulated  out  of  the  profits  of  business  during  our 
Civil  War,  and  still  more  out  of  the  World  War,  while  their 
neighbors  were  spending  their  time  in  the  unremunerative  work 
of  the  soldier.  War  is  not,  in  fact,  a  burden  upon  the  whole 
generation.  It  is  a  burden  only  upon  those  who  do  its  work  and 
those  who  pay  its  expenses.  If  war  taxes  are  not  increased, 
many  will  absolutely  escape  all  war  burdens.  The  question  is, 
therefore,  that  of  distributing  the  burden  not  over  several  gen- 
erations but  over  all  the  individuals  of  each  generation,  and 
distributing  it  as  nearly  equally  as  is  humanly  possible. 

Distributing  the  burden  between  the  fighters  and  nonfighters 
of  the  present  generation.  There  can  be  nothing  even  approach- 


668  PRINCIPLES  OF  NATIONAL  ECONOMY 

ing  an  equal  distribution  of  the  burdens  among  the  individuals 
of  the  generation  that  fights  the  war  if  some  do  the  fighting 
while  others  stay  at  home  and  enjoy  the  prosperity  of  peace 
time.  People  who  complain  that  they  cannot  live  as  well  in 
war  time  as  in  peace  time  are  apparently  unwilling  to  bear 
any  of  the  burdens  of  war  whatsoever,  even  though  others 
are  sacrificing  their  lives,  while  still  others  are  enduring  severe 
hardships  on  very  meager  pay.  The  case  is  still  worse  when 
some  of  the  people  actually  prosper  more  in  war  time  than 
in  peace  time.  In  order  that  there  may  be  even  a  remote 
approach  to  equality  of  sacrifice,  those  who  stay  at  home  must 
be  taxed  until  their  burdens  begin  to  approach  those  of  the 
men  who  go  to  the  front.  After  this  is  achieved,  and  the  bur- 
dens of  war  are  distributed  among  the  members  of  the  existing 
generation,  is  the  time  to  begin  to  talk  about  shifting  a  part 
of  the  burdens  of  war  onto  future  generations.  If  a  sincere 
effort  is  not  first  made  to  require  all  the  existing  generation 
to  bear  a  part  of  the  cost,  the  result  of  shifting  the  burden  to 
the  next  generation  is  to  enable  some  to  escape  altogether  and 
others  to  carry  a  double  burden.  It  is  merely  a  device  under 
which  they  who  go  to  the  front  and  carry  the  real  burdens  are 
then  asked  to  come  home — if  they  do  come  home — and  help 
carry  the  financial  burden  by  paying  the  taxes  that  will  be 
needed  to  recompense  those  who  have  lent  money  to  the  gov- 
ernment. This  is  what  actually  happens  when  a  war  is  financed 
mainly  by  borrowing  rather  than  by  taxation. 

Purchasing  foreign  supplies.  A  third  reason  for  borrowing 
is  found  in  the  necessity  of  purchasing  foreign  supplies.  In 
time  of  war  the  national  production  of  articles  for  private  con- 
sumption must  necessarily  be  reduced  in  order  that  the  country 
may  recruit  its  armies  and  produce  military  supplies.  Conse- 
quently it  cannot  send  so  much  produce  abroad ;  at  the  same 
time  it  will,  in  all  probability,  need  to  increase  its  imports  from 
foreign  countries.  These  imports,  therefore,  must  be  paid  for 
largely  with  money.  In  order  to  meet  these  foreign  payments 
extraordinary  sources  of  monetary  supply  must  be  tapped; 


THE  FINANCING  OF  A  WAR  669 

literally,  the  money  which  is  sent  abroad  for  the  purchase  of 
supplies  must  be  got  back  again.  Since  the  foreign  countries 
cannot  be  taxed,  it  must  be  borrowed  back,  perhaps  over  and 
over  again,  in  order  to  make  continual  purchases.  Here  is 
where  the  credit  of  the  country  may  be  strained.  In  this  case, 
however,  the  country's  financial  failure  would  be  due  primarily 
to  its  inability  to  produce  its  own  supplies  rather  than  to  any- 
thing inherent  in  the  problem  of  war  finance.  The  country 
must  either  be  able  to  produce  its  own  supplies  or  else  have 
credit  enough  to  buy  them  from  abroad. 

Production  of  war  supplies  must  be  vastly  increased.  In  con- 
sidering the  relative  merits  of  taxing  and  borrowing  as  means 
of  financing  a  war,  we  must  never  lose  sight  of  certain  basic 
and  incontrovertible  facts.  One  is  that  if  we  are  to  put  several 
million  men  into  the  army  and  navy  it  will  be  necessary  to  put 
several  million  others  into  the  munition  factories,  shipyards,  and 
other  establishments  for  the  production  of  war  supplies.  We 
must  even  increase  the  output  of  our  mines  and  especially  of 
our  farms,  in  order  to  provide  the  raw  materials  and  the  food 
supplies.  All  this  will  require  a  good  many  millions  of  men. 
These  men  cannot  be  created  out  of  nothing. 

Sources  of  additional  man  power.  There  are  three  sources 
from  which  this  additional  man  power  can  be  drawn.  In  the 
first  place,  those  who  are  now  at  work  may  work  a  little  harder, 
either  by  speeding  up  or  by  working  longer  hours.  In  the 
second  place,  those  who  are  not  now  at  work  may  be  put  to 
work.  In  the  third  place,  those  who  are  employed  in  the  in- 
dustries which  are  not  indispensable  may  be  withdrawn  from 
them  in  order  to  expand  the  industries  that  are  indispensable 
to  the  prosecution  of  a  war. 

The  first  two  of  these  sources  of  man  power  may  be  sufficient 
if  the  war  is  to  prove  a  trivial  affair,  but  if  it  is  to  be  a  serious 
affair  we  shall  have  to  draw  upon  all  three,  and  particularly 
upon  the  third.  It  will  be  absolutely  impossible  to  continue 
running  the  luxury-producing  industries  or  the  industries  which 
produce  superfluities  at  the  rate  which  is  possible  in  times  of 


670  PRINCIPLES  OF  NATIONAL  ECONOMY 

peace.  If  the  government  needs  the  man  power  which  has 
been  engaged  in  producing  luxuries  and  superfluities,  individ- 
uals must  perforce  cut  down  their  consumption  of  such  things. 
There  is  no  alternative. 

Enforced  economy.  It  will  not  always  be  necessary,  how- 
ever, for  the  government  by  authority  directly  to  forbid  us  to 
consume  these  things.  This  enforced  economy  will  come  about 
in  other  ways.  The  government  must  have  money  with  which 
to  pay  its  soldiers  and  sailors  and  to  buy  its  munitions  and 
supplies.  The  citizens  of  the  Republic  will  be  called  upon 
to  supply  the  government  with  this  money.  The  money  will 
be  taken  either  in  the  form  of  taxation  or  in  that  of  voluntary 
loans. 

Characteristic  fallacies.  It  is  necessary,  however,  to  clear 
away  certain  confusions  which  arise.  The  sources  of  this 
confusion  are  mainly  embodied  in  the  following  statements: 
(i)  excessive  taxation  upon  consumption  will  cause  popular 
resentment;  (2)  excessive  taxes  on  industry  will  disarrange 
business,  dampen  enthusiasm,  and  restrict  the  spirit  of  enter- 
prise at  the  very  time  when  the  opposite  is  needed ;  (3)  exces- 
sive taxes  on  incomes  will  deplete  the  surplus  available  for 
investments  and  interfere  with  the  placing  of  the  enormous 
loans  which  will  be  necessary  in  any  event ;  (4)  excessive  taxes 
on  wealth  will  cause  a  serious  diminution  of  the  incomes  which 
are  at  present  largely  drawn  upon  for  the  support  of  educa- 
tional and  philanthropic  enterprises;  (5)  excessive  taxation  at 
the  outset  of  the  war  will  reduce  the  elasticity  available  for 
'the  increasing  demands  that  are  soon  to  come. 

As  to  the  first  of  these  objections,  it  is  political  rather  than 
economic.  Such  a  tax  as  is  proposed  will  cause  popular  resent- 
ment only  on  condition  that  the  people  are  crudely  ignorant  or 
unpatriotic, — that  they  are  ignorant  enough  to  imagine  that 
the  expenses  of  the  war  can  be  paid  out  of  nothing  or  un- 
patriotic enough  to  be  unwilling  to  bear  the  necessary  burdens 
of  the  war.  Even  though  the  tax  should  cause  popular  resent- 
ment, it  would  not  affect  in  one  way  or  another  the  economic 


THE  FINANCING  OF  A  WAR  671 

wisdom  of  such  a  policy.  It  is  one  thing  to  say  that  a  policy  is 
economically  sound ;  it  is  quite  a  different  thing  to  say  that  the 
people  know  enough  about  economics  to  understand  its  sound- 
ness. An  autocrat  who  was  trying  to  determine  just  how  much 
his  people  would  stand  might  well  consider  this  question.  In  a 
democracy,  however,  the  people  need  not  stop  to  ask  them- 
selves how  much  they  themselves  will  stand  or  whether  their 
own  voluntary  acts  would  cause  resentment  in  themselves. 

As  to  the  second  proposition,  it  is  necessary  only  to  point  out 
that  a  great  war,  absorbing  several  millions  of  men  of  produc- 
tive age  either  in  the  actual  fighting  or  in  the  production  of 
supplies  for  those  who  do  the  fighting,  cannot  possibly  be 
carried  on  without  a  good  deal  of  disarrangement  of  business. 
Moreover,  there  will  be  the  same  disarrangement  of  business 
whether  we  turn  our  money  over  to  the  government  voluntarily, 
and  thus  voluntarily  cut  down  our  ability  to  purchase  supplies 
for  private  consumption,  or  whether  we  turn  the  same  amount 
of  money  over  to  the  government  in  the  form  of  taxes.  As  to 
the  suggestion  that  heavy  taxes  will  dampen  enthusiasm  and 
restrict  the  spirit  of  enterprise,  that  is  a  question  of  national 
psychology.  It  is  hardly  probable  that  citizens  will  restrict 
enterprise  and  have  their  enthusiasm  dampened  by  taxes  the 
reason  for  which  they  understand  and  approve.  In  fact,  rea- 
sonably heavy  taxes,  for  a  purpose  which  they  understand  and 
approve,  will  probably  spur  them  on  to  greater  effort  and  en- 
terprise,— will  tend  to  cause  them  to  work  longer  hours  and 
take  shorter  vacations  in  order  to  be  able  to  pay  them. 

The  third  proposition  is  absurd.  The  money  which  is  raised 
by  taxation  will  not  have  to  be  raised  by  loans.  The  only  pos- 
sible way  in  which  heavy  taxes  can  interfere  with  the  placing 
of  enormous  loans  is  by  making  these  unnecessary.  Even  with 
the  proposed  tax,  loans  will  be  necessary,  but  the  less  there 
is  raised  by  taxation,  obviously  the  more  there  must  be  raised 
by  loans. 

The  fourth  proposition  has  some  merit,  but  it  may  well  be 
asked  whether,  in  a  time  of  great  national  crisis,  even  philan- 


672  PRINCIPLES  OF  NATIONAL  ECONOMY 

thropic  work  which  is  not  connected  with  the  war  should  not 
be  somewhat  curtailed.  A  great  deal  depends  upon  how  des- 
perate the  crisis  is.  All  needless  luxuries  and  every  form  of 
consumption  except  those  which  are  indispensable  should  of 
course  be  cut  off  first.  If  this  is  done,  most  of  the  philanthropic 
work  can  still  be  carried  on. 

The  fifth  proposition  can  mean  nothing  more  than  that  if 
we  tax  ourselves  to  the  limit  at  the  start  we  cannot  later  on 
increase  taxes  by  as  large  a  percentage  as  we  could  if  we  taxed 
ourselves  lightly  at  the  start.  True  enough ;  but  it  would  not 
be  necessary. 

People  cannot  lend  more  money  than  there  is.  One  of  the 
nai've  objections  to  the  policy  of  paying  a  large  proportion  of 
the  expenses  of  the  war  by  taxes  is  that  when  expenditures 
approach  the  gigantic  sums  of  present-day  warfare  such  a  tax 
policy  would  require  more  than  the  total  surplus  of  social  in- 
come. If  by  social  income  is  meant  money  income,  it  will  apply 
to  loans  as  well  as  to  taxes.  The  people  cannot  turn  over  to 
the  government,  either  by  loans  or  by  taxes,  more  money  than 
they  have  or  can  lay  their  hands  upon.  They  have  just  as 
much  money  to  pay  to  the  government  in  the  form  of  taxes  as 
they  have  in  the  form  of  loans.  The  possibilities  are  exactly 
equal  in  the  two  cases.  It  is  only  a  question  as  to  which  is  the 
better  policy  or  the  better  method  of  getting  that  money  into 
the  government  treasury. 

If,  however,  by  social  income  is  meant  the  products  of  in- 
dustry and  enterprise,  the  proposition  becomes  an  absurdity. 
No  nation  can  put  into  a  war  more  than  its  total  surplus  over 
and  above  what  is  necessary  to  maintain  the  life  of  the  people. 
That  would  be  like  saying  that  it  is  necessary  for  a  country  to 
put  into  the  war  more  than  its  total  man  power. 

The  real  cost  of  the  war  cannot  be  postponed.  Another  basic 
and  indisputable  fact  which  we  should  bear  in  mind  is  that 
the  expenses  of  the  war,  measured  in  productive  power  and 
goods  (or  measured  as  all  costs  must  ultimately  be  measured ; 
namely,  in  energy  expended),  will  actually  be  paid  as  we  go 


THE  FINANCING  OF  A  WAR  673 

along,  whatever  our  financial  policy.  Soldiers  cannot  use  guns 
and  ammunition  nor  consume  rations  which  are  to  be  produced 
in  the  future.  Everything  that  is  actually  used  in  the  war  will 
be  produced  before  it  is  used ;  the  cost,  in  terms  of  energy,  will 
have  been  paid.  In  terms  of  real  income,  as  distinct  from 
money  income,  the  war  will  actually  be  supported  by  current 
income ;  that  is,  out  of  the  products  of  current  industry.  The 
only  question  before  us  is,  Where  and  how  will  the  government 
get  the  money  with  which  to  pay  for  these  things  ?  It  can  raise 
it  largely  by  taxation  or  largely  by  loans ;  in  any  case  it  will 
have  to  use  a  combination  of  the  two  methods.  The  patriotic 
theory  is  that  it  should  raise  as  much  as  possible  by  taxation 
and  borrow  only  as  a  supplementary  measure.  It  would  take 
some  time  to  get  the  taxing  machinery  in  operation,  and  the 
money  which  it  puts  into  the  treasury  would  come  in  gradually. 
At  the  beginning  of  a  war  a  large  sum  must  be  had  at  once. 
The  only  possible  way  to  raise  that  initial  sum  is  by  borrowing. 
The  slacker's  theory  is  that  the  war  should  be  financed  as  far 
as  possible  by  loans, — that  taxes  should  be  increased  only  in 
order  to  pay  the  necessary  interest  on  these  loans  and  such 
other  necessary  expenses  as  it  seems  expedient  to  pay  out  of 
the  proceeds  of  the  loans. 

Therefore  the  real  question,  stripped  of  all  verbiage,  is  simply 
this,  Shall  those  who  stay  at  home  pay  for  a  war  as  far  as  pos- 
sible as  they  go  along,  or  shall  they  ask  the  government  to 
borrow  the  money  in  order  that  they  may  not  be  too  much 
disturbed  or  disarranged  and  that  the  others  who  go  to  the 
front  and  do  the  fighting  may  help  to  pay  for  the  war  after  they 
return  home — if  they  do  actually  return? 

Keeping  money  in  circulation.  It  seems  to  be  assumed,  on 
the  other  hand,  that  money  possesses  some  inherent  power  of 
production  instead  of  being  simply  a  medium  of  exchange. 

There  is  a  story  of  a  little  girl  who  decided  to  spend  her  mis- 
sionary money  for  ice  cream  in  order  that  the  ice-cream  man 
might  have  money  to  give  to  the  missionary  cause.  There  are 
men  who  try  to  persuade  us  that  we  must  do  the  same  thing 


674  PRINCIPLES  OF  NATIONAL  ECONOMY 

in  order  to  raise  money  for  a  war.  They  tell  us  that  unless 
we  continue  spending  our  money  freely  for  unnecessary  things, 
the  sellers  of  these  things  will  not  be  able  to  buy  Liberty 
Bonds  or  to  pay  war  taxes.  We  are  told  by  others  that  money 
must  be  kept  in  circulation ;  otherwise  our  prosperity  will  be 
destroyed,  and  without  prosperity  we  cannot  finance  a  war. 

Both  these  arguments  attribute  to  money  a  productive  power 
which  it  does  not  possess.  To  spend  it  for  unnecessary  things 
is  to  hire  men  to  produce  them.  As  fast  as  these  men  can 
be  used  in  the  industries  made  necessary  by  a  war  they  are 
needed  there.  To  keep  them  in  the  unnecessary  industries  is 
to  interfere  with  the  expansion  of  the  necessary  ones.  There- 
fore it  is  pretty  clear  that  during  the  course  of  a  war,  while 
men  are  badly  needed  in  the  necessary  industries,  it  will  be 
uneconomical  and  even  criminal  for  private  individuals  to 
continue  to  spend  money  for  unnecessary  things. 

But,  granting  that  it  is  important  to  keep  money  circulating, 
something  depends  upon  the  channels  in  which  it  circulates. 
The  dollar  which  I  spend  for  an  unnecessary  thing  circulates, 
it  is  true ;  but  it  is  equally  true  that  it  circulates  if  I  give  it 
to  the  government,  the  Red  Cross,  or  some  other  agency 
directly  connected  with  the  war,  to  be  spent  for  some  necessary 
thing.  So  far  as  mere  circulation  is  concerned  there  is  no 
appreciable  difference  between  the  two  cases.  But  something 
else  is  involved  besides  this.  The  productive  power  which 
creates  the  unnecessary  thing  is  not  so  well  employed,  from  the 
standpoint  of  national  economy,  as  the  productive  power  which 
creates  the  necessary  thing. 

Granting  also  that  it  is  important  to  give  employment  to 
men,  something  depends  upon  what  they  are  employed  to  do. 
To  spend  a  dollar  on  an  unnecessary  thing  does,  it  is  true,  give 
employment  to  labor,  but  it  is  equally  true  that  the  same 
dollar  spent  for  a  necessary  thing  would  employ  the  same 
amount  of  labor.  The  only  question  is  whether  it  is  better 
to  have  the  labor  employed  in  producing  necessary  things  or 
unnecessary  things. 


THE  FINANCING  OF  A  WAR  675 

If  "Business  as  usual"  means  merely  that  we  should  go  on 
doing  precisely  the  same  things  in  time  of  war  as  in  time  of 
peace,  it  is  a  palpable  absurdity.  If  it  means  that  everybody 
is  to  keep  as  busy  as  ever  or  become  much  busier  than  ever,  it  is 
good  advice  so  far  as  it  goes.  What  we  really  need  to  consider 
is,  What  shall  we  keep  ourselves  and  others  busy  doing  ?  Shall 
we  keep  ourselves  and  them  busy  producing  unnecessary  things 
or  shall  we  do  what  we  can  to  keep  ourselves  and  them  busy 
doing  the  necessary  things?  Obviously  the  latter.  ''Busier 
than  ever"  is  a  much  better  motto  than  "Business  as  usual." 

The  only  way  we  can  possibly  keep  everybody  doing  the 
necessary  things  in  war  time  is,  first,  to  do  something  our- 
selves which  is  necessary  and,  second,  to  spend  all  our  money 
for  necessary  things.  If  we  have  more  money  to  spend  than 
is  sufficient  to  purchase  necessary  things  for  our  own  consump- 
tion, we  can  either  spend  the  surplus  for  tools  of  production 
in  some  necessary  industry  (that  is,  we  can  invest  it)  or 
we  can  turn  it  over  to  the  government,  the  Red  Cross,  or 
some  other  public  agency.  This  agency  can  then  spend  it  for 
much-needed  other  things. 

By  all  means,  therefore,  let  us  keep  money  circulating  in 
war  time — not  that  this  in  itself  means  much,  but  because  it 
gives  direction  to  the  real  productive  energy  of  the  country. 
But  let  us  see  to  it  that  every  dollar  which  we  put  into  circu- 
lation is  put  where  it  will  do  the  most  good, — where  it  will 
direct  the  productive  energy  of  the  country  into  the  necessary 
rather  than  into  the  unnecessary  industries. 

COLLATERAL  READING 

ADAMS,  HENRY  C.    The  Science  of  Finance.    New  York,  1898. 
BASTARLE,  C.  F.    Public  Finance  (third  edition).    New  York,  1917. 
SELIGMAX,  E.  R.  A.    The  Shifting  and  Incidence  of  Taxation.    American 
Economic  Association,  1892. 


PART  VIII.    REFORM 


CHAPTER  L 

LABOR  PROGRAMS1 

Four  programs.  All  programs  for  the  improvement  of  the 
condition  of  the  wageworkers  fall  into  four  general  classes, 
though  there  are  many  combinations  and  mixtures  of  these 
four.  For  the  sake  of  brevity  these  four  classes  may  be 
arranged  as  follows : 

I.  Programs  depending  upon  voluntary  agreements  among  free 
citizens. 

1.  The  balancing-up  programs. 

2.  The  collective-bargaining  programs. 

II.  Programs  depending  upon  authority  and  compulsion. 

3.  The  voting  programs. 

4.  The  fighting  programs. 

By  the  balancing-up  programs  are  meant  all  programs  which 
aim  to  create  or  restore  a  balance  among  occupations  so  as  to 
give  those  in  one  occupation  the  ability  to  bargain  to  their 
advantage  as  effectively  as  those  in  any  other.  Such  a  pro- 
gram would  aim  to  enable  the  unskilled  worker,  as  an  inde- 
pendent bargainer,  to  prosper  as  well  as  the  skilled  worker, 
the  technician,  the  business  manager,  or  the  capitalist.  It 
would  aim  to  equalize  the  prosperity  of  different  classes  by 
first  equalizing  bargaining  power,  so  that  each  occupational 
class  could,  by  the  simple  process  of  voluntary  agreement 
among  free  and  equal  citizens,  gain  as  many  advantages  as  any 
other  occupational  class.  This  would  combine  equality  with 

1The  substance  of  this  chapter  is  found  in  an  article  by  the  author,  entitled 
"Four  Labor  Programs,"  in  the  Quarterly  Journal  of  Economics  for  February, 
1919,  Vol.  XXXIII,  No.  2. 

679 


68o  PRINCIPLES  OF  NATIONAL  ECONOMY 

individual  liberty  and  initiative.  It  would  leave  the  individual 
free  to  make  his  own  arrangements  with  other  individuals  or 
groups  of  individuals,  everyone  acting  voluntarily  and  without 
any  compulsion  whatsoever.  Compulsion  would  be  exercised 
only  to  compel  the  fulfillment  of  agreements  voluntarily  en- 
tered into, — never  to  compel  individuals  to  enter  into  business 
arrangements  against  their  will. 

By  the  collective-bargaining  program  is  meant  one  under 
which  individuals  voluntarily  join  associations  and  surrender 
to  the  association  the  power  to  make  business  arrangements 
and  agreements  for  themselves.  So  long  as  no  force  or  threats 
of  force  are  used  to  compel  the  individual  to  join  such  an 
association  or  to  prevent  his  withdrawing  from  it,  such  a 
program  is  voluntary  and  not  compulsory.  Voluntary  agree- 
ments among  free  citizens  remain  the  basis  of  organization, 
rather  than  the  authority  and  compulsion  of  the  state  or  any 
other  organization.  This  is  the  type  of  business  organization 
which  has  prevailed  in  free  countries  under  liberal  governments. 

By  the  voting  programs  are  meant  all  those  where  the  wage- 
workers  are  to  use  their  voting  strength  to  get  control  of  the 
government  and  then  use  the  compulsory  power  of  the  gov- 
ernment to  secure  for  themselves  what  they  want.  Much  of 
our  social  legislation  and  all  programs  of  state  socialism  fall  in 
this  class. 

By  the  fighting  programs  are  meant  all  those  under  which 
the  wageworkers  are  to  use  their  fighting  strength  to  get  what 
they  want,  without  waiting  for  the  slow  process  of  gaining 
control  of  the  government  by  the  constitutional  methods  of 
voting.  These  fighting  programs  are  sometimes  called  by  the 
more  euphonious  name  of  "  direct  action."  Sabotage,  strikes 
accompanied  by  violence  or  threats  of  violence,  syndicalism  of 
the  more  extreme  sort,  and  Bolshevism  fall  in  this  class. 

Conditions  that  determine  which  program  shall  be  followed. 
It  is  important  that  we  understand  the  relation  of  each  of 
these  programs  to  the  others  and  to  the  general  economic  back- 
ground. It  is  the  belief  of  the  writer  that  each  is  the  logical 


LABOR  PROGRAMS  681 

and  inevitable  outcome  of  general  economic  conditions ;  that 
one  who  understands  these  conditions  in  any  time  and  place 
can  predict,  with  some  approach  to  certainty,  which  of  the  four 
will  be  the  dominant  program  ;  and  that  the  determining  factor 
in  each  case  will  be  the  balance  or  lack  of  balance  among  the 
various  factors  of  production,  human  and  nonhuman. 

The  idea  is  too  prevalent  that  bad  economic  conditions  are 
always  and  necessarily  the  fault  of  some  person  or  some  insti- 
tution and  that  the  remedy  is  therefore  the  punishment  of  the 
guilty  person  or  the  reform  of  the  defective  institution.  The 
fact  is,  as  shown  in  Chapter  XXXIII,  that  many  bad  economic 
conditions  grow  out  of  lack  of  balance  among  the  various 
factors  which  have  to  be  combined  to  get  any  large  economic 
result.  An  unbalanced  ration  means  poor  nutrition ;  an  unbal- 
anced soil  means  poor  crops ;  an  unbalanced  business  organi- 
zation— say  a  farm  where  there  is  too  much  land  or  not  enough 
labor  or  equipment  to  cultivate  it — means  inefficient  produc- 
tion; and,  finally,  an  unbalanced  nation,  which  has  too  much 
labor  and  too  little  capital,  too  much  population  and  not  enough 
land,  too  much  of  one  kind  of  labor  and  not  enough  of  another 
to  work  effectively  with  it,  or  any  other  of  an  infinite  number 
of  possible  bad  combinations,  means  ineffective  production  and 
is  likely  to  mean  a  bad  distribution  of  products. 

Physical  basis  of  value.  The  laws  of  value,  instead  of  de- 
pending, as  some  would  have  us  believe,  upon  a  whimsical 
psychology  or  an  accidental  institutional  background,  are  fre- 
quently adaptations  to  the  physical  facts  connected  with  this 
problem  of  balance.  If  a  man  is  consuming  a  ration  with  too 
much  starch  and  too  little  protein  his  craving  for  foods  rich  in 
protein  will  increase  and  his  taste  for  foods  rich  in  starch  will 
decrease  regardless  of  the  prevailing  school  of  psychology  or 
the  institutional  background.  This  increase  in  the  craving  for 
protein  and  decrease  in  the  craving  for  starch  will  have  some 
bearing  not  only  upon  his  relative  valuation  of  different  foods 
but  also  upon  the  relative  prices  which  he  will  be  willing  to 
pay  for  them.  If  the  relative  market  supply  of  food  of  the  two 


682  PRINCIPLES  OF  NATIONAL  ECONOMY 

kinds  is  such  as  to  make  everybody  crave  foods  rich  in  protein 
and  not  those  rich  in  starch,  that  fact  is  likely  to  influence 
the  relative  market  prices  of  the  two  kinds  of  food.  The  price 
is  an  adaptation  to  the  physiological  situation  and  not  to  the 
institutional  background.  Even  under  communism,  where  no 
open  market  was  allowed  to  exist,  if  the  one  kind  of  food  be- 
came scarcer  than  the  other  it  would  be  pretty  difficult  to 
prevent  people  from  giving  expression  to  their  craving  for 
protein  by  trying  hard  to  get  more  of  it,  either  by  surreptitious 
bartering  or  by  stealing. 

A  question  of  balance.  The  farmer  whose  soil  is  unbalanced, 
say  with  too  much  nitrogen  and  too  little  potash,  and  who 
observes  that  the  use  of  a  fertilizer  rich  in  potash  adds  con- 
siderably to  his  crop  is  pretty  certain  to  feel  a  stronger  desire 
for  potash  than  for  nitrogen.  Granting  that  he  wants  a  large 
crop,  the  preference  for  potash  as  against  nitrogen  does  not 
depend  upon  the  prevailing  psychology  nor  upon  the  institu- 
tional background.  The  fact  that  a  larger  crop  follows  the 
addition  of  a  certain  quantity  of  potash  to  that  already  in 
the  soil,  whereas  the  addition  of  an  equal  quantity  of  nitrogen 
to  that  already  there  is  not  followed  by  a  noticeable  increase 
of  the  crop,  is  a  physical  and  not  a  social  or  a  psychological 
fact.  Even  a  communistic  society,  if  it  perceived  that  its  soil 
was  thus  unbalanced  and  if  it  knew  that  it  needed  additional 
potash  more  than  it  needed  additional  nitrogen,  would  doubtless 
make  greater  effort  to  get  potash  than  to  get  nitrogen,  though 
it  might  not  be  wise  enough  to  adopt  the  simple  expedient  of 
allowing  people  to  offer  a  higher  price  for  the  one  than  for 
the  other. 

This  principle  applies  to  the  ratio  of  population  to  land,  or  to 
equipment,  or  to  the  ratio  of  different  kinds  of  labor  to  one 
another,  as  well  as  to  the  different  food  elements  in  a  ration  or 
the  different  elements  of  plant  growth  in  the  soil.  A  community 
—whether  communistic,  individualistic,  or  otherwise — in  which 
there  was  an  abundance  of  land  and  labor  but  little  equipment 
would  feel  the  need  of  additional  equipment  more  than  of 


LABOR  PROGRAMS  683 

additional  land  or  labor.  This  feeling  would  be  based  upon  the 
observation  of  a  physical  fact ;  namely,  that  with  its  limited 
equipment  a  few  additional  acres  brought  under  cultivation 
would  add  little  or  nothing  to  the  total  product  because  there 
was  not  equipment  enough  to  cultivate  properly  the  land 
already  in  cultivation.  Similarly,  the  addition  of  a  few  la- 
borers would  add  very  little  to  the  crop  because  of  the  lack  of 
sufficient  tools  for  those  already  at  work.  But  the  addition  of 
a  few  tools  and  implements  of  the  proper  sort  would  enable 
the  laborers  to  work  to  better  advantage  and  to  cultivate  the 
land  more  satisfactorily,  and  would  therefore  result  in  a  larger 
crop.  If,  on  the  other  hand,  there  were  an  excess  of  good  tools 
and  a  scarcity  of  either  labor  or  land,  the  community  would  not 
desire  additional  tools  so  intensely  as  it  would  desire  additional 
labor  or  land.  The  reason  in  this  as  in  the  other  case  would  be 
physical  rather  than  social,  institutional,  or  psychological.  It 
would  be  based  upon  the  observation  that  a  large  increase  of 
product  follows  every  addition  to  its  labor  or  land,  whereas  no 
such  increase  follows  an  addition  to  its  stock  of  tools.  This 
would  be  as  true  in  a  communistic  as  in  an  individualistic  so- 
ciety. It  would  require  rather  severe  repression  to  prevent  men 
from  giving  expression  to  their  desires  by  offering  a  high  price 
on  the  one  hand  and  a  low  price  on  the  other.  If  men  were  per- 
mitted to  barter,  or  to  buy  and  sell,  to  any  extent  (that  is, 
unless  these  operations  were  positively  repressed),  prices  would 
adjust  themselves  to  this  fact  without  the  shadow  of  a  doubt. 
As  suggested  above,  this  principle  applies  also  to  the  ratios 
among  the  different  kinds  of  labor  and  among  the  different 
kinds  of  equipment.  In  a  community  where  there  were  more 
horses  than  were  needed  to  pull  all  the  plows,  harrows,  and 
other  implements  that  were  to  be  had,  it  would  add  very  little 
to  the  crops  to  add  a  few  horses  to  the  existing  stock,  but  it 
would  add  considerably  to  the  crop  if  a  few  plows,  harrows, 
and  other  implements  could  be  added.  Opposite  results  would 
follow,  of  course,  if  it  should  happen  that  there  were  more 
plows,  harrows,  and  other  implements  than  the  existing  stock 


684  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  horses  could  pull.  Again,  if  in  a  cotton-mill  town  there 
were  more  spinners  than  were  needed  to  supply  yarn  to  the 
weavers,  it  would  not  add  much  to  the  total  output  if  a  few 
more  spinners  should  appear  on  the  scene ;  whereas,  if  a  few 
more  weavers  were  to  appear  it  would  make  a  great  deal  of 
difference.  Under  such  circumstances  it  would  be  more  advan- 
tageous to  the  community,  assuming  that  it  wanted  cotton 
cloth,  to  add  to  its  corps  of  weavers  than  to  add  to  its  corps  of 
spinners.  One  way  to  get  more  would  be  to  offer  a  higher 
wage.  This  is  not  the  only  way :  weavers  could,  for  example, 
be  conscripted  as  soldiers  are.  Liberal  communities  have  gen- 
erally preferred  the  less  drastic  method  of  offering  a  higher 
wage  for  the  kind  of  labor  which  is  scarcer  in  proportion  to 
the  need  for  it.  This  would  result  in  an  uneven  distribution 
of  the  product  of  the  cotton  industry. 

It  is  true,  of  course,  that  this  lack  of  balance  between  the 
number  of  spinners  and  the  number  of  weavers  could  not  last 
very  long.  Between  those  two  occupations  there  is  no  great 
gulf  fixed.  The  balance  would  soon  be  restored,  if  it  were  ever 
destroyed,  by  the  habit  of  seeking  the  more  attractive  occupa- 
tion. But  there  is  a  much  wider  gulf  fixed  between  other 
occupations — for  example,  between  such  occupations  as  those 
of  unskilled  laborers  and  employers,  between  bookkeepers  and 
general  managers,  etc.  In  such  cases  it  is  not  easy  to  preserve 
a  perfect  balance,  and  consequently  an  industry  may  remain 
for  a  long  time  in  an  unbalanced  condition  as  respects  such 
occupations  as  these. 

It  goes  without  saying  that  the  necessity  for  a  balance  among 
the  various  factors  of  nutrition  and  production  is  a  physical  or 
a  physiological  necessity.  It  goes  deeper  than  fashion ;  it  is 
more  fundamental  than  any  human  institution.  Many  of  the 
laws  of  the  market  are  based  upon  this  necessity,  and  the 
market  itself  as  an  institution  represents  an  organized  attempt 
to  adjust  ourselves  to  it.  Many  other  human  institutions,  in- 
stead of  being  a  background  for  the  laws  of  value,  are  merely 
outgrowths  of  these  laws. 


LABOR  PROGRAMS  685 

Cases  where  customs  and  institutions  count.  There  are,  to 
be  sure,  other  cases  where  convention,  custom,  fashion,  or  whim 
is  a  determining  factor  in  value.  In  all  such  cases  it  may  with 
justice  be  said  that  a  knowledge  of  the  institutional  background 
is  necessary  to  an  understanding  of  the  phenomena  of  value. 
For  example,  the  Mohammedan's  abhorrence  of  pork  is  wholly 
an  institutional  affair.  But  whether  one  were  Mohammedan, 
Jew,  or  Christian  would  not  make  the  slightest  difference  in  the 
results  of  a  feeding  experiment.  If  a  pig  were  given  too  much 
starch  arid  too  little  protein,  and  it  were  found  that  adding  pro- 
tein would  add  considerably  to  his  growth,  whereas  adding 
starch  would  not,  we  should  be  dealing  with  a  physical  fact.  In 
short,  our  institutional  background  affects  mainly  our  valuation 
of  pork  rather  than  the  relative  valuation  of  different  factors  in 
pork  production.  In  general,  institutions  may  be  said  to  affect 
our  valuations  of  consumers'  goods  rather  than  of  productive 
agents.  The  relative  values  of  productive  agents  are  determined 
almost  exclusively  by  the  physical  and  objective  facts  relating 
to  their  balance  or  lack  of  balance  in  the  physical  process 
of  production. 

So  far  as  the  labor  market  is  concerned,  customs,  traditions, 
and  institutions  have  their  principal  effect,  first,  on  the  incomes 
of  those  classes  which  Mill  and  other  economists  denominated 
as  unproductive  laborers — that  is,  of  those  who  render  direct 
personal  service  and  do  not  aid  in  producing  vendible  com- 
modities ;  second,  on  the  incomes  of  those  who,  without  coop- 
eration, produce  a  complete  consumable  commodity.  The  first 
includes  barbers,  valets,  servants,  physicians,  lawyers,  teachers, 
preachers,  and  a  multitude  of  others.  Whether  barbers  flourish 
or  not  will  depend,  of  course,  somewhat  upon  styles.  Whether 
physicians  of  various  schools  earn  good  incomes  or  not  will 
depend  upon  a  multitude  of  circumstances,  including  the  habits 
of  the  people,  the  repute  in  which  the  various  schools  are  held, 
etc.  Similar  observations  could  be  made  regarding  all  other 
classes  who  render  direct  personal  service.  Institutions  affect 
the  value  of  their  services  very  much  as  they  do  the  value  of 


686  PRINCIPLES  OF  NATIONAL  ECONOMY 

consumers'  goods.  But  granting  that  a  consumers'  good  is 
sufficiently  desired  to  give  it  a  price  on  the  market,  then  the 
relative  value  of  the  factors  which  enter  into  its  production 
is  mainly  a  question  of  physical  fact  which  can  be  ascer- 
tained by  physical  experiment.  If  a  teetotaler  who  abhorred 
whisky  could  bring  himself  to  manufacture  whisky  for  the 
market,  if  a  Quaker  who  abhorred  jewelry  could  bring  him- 
self to  manufacture  jewelry,  or  if  a  Mohammedan  who  ab- 
horred pork  could  bring  himself  to  produce  pork,  he  would 
reach  the  same  conclusions,  in  any  given  time  and  place,  as  to 
the  relative  value  of  the  different  factors  of  production  as  would 
be  reached  by  any  other  producer  of  equal  intelligence. 

The  second  group — that  consisting  of  individuals  who,  un- 
aided and  without  cooperation,  produce  consumable  commod- 
ities in  complete  form — is  almost  negligible.  The  fisherman 
who  sells  his  individual  catch  may  be  cited  as  an  example. 

Labor  problems  grow  out  of  division  of  labor.  The  labor 
problems  which  are  acute  at  the  present  time  relate  to  the  com- 
pensation of  labor  which  works  in  combination  with  many  other 
factors  in  production.  Those  laborers  who  render  direct  per- 
sonal service,  and  those  who  produce  by  individual  effort  alone, 
sometimes  have  their  grievances.  These  grievances  occasion- 
ally give  rise  to  what  may  be  called  a  special  social  problem, 
but  such  problems  differ  materially  from  those  labor  problems 
in  which  the  public  is  now  chiefly  interested.  These  prob- 
lems are  all  more  or  less  directly  concerned  with  the  question  of 
sharing  the  products  of  those  industries  which  combine  many 
factors,  including  not  simply  labor,  land,  and  capital  but  many 
kinds  of  labor  and  many  kinds  of  capital.  This  is  precisely  the 
kind  of  problem  with  which  psychology,  custom,  tradition, 
government,  religion,  and  other  institutions  have  very  little  to 
do  directly,  though  they  may  exert  a  great  deal  of  indirect 
influence.  This  problem  resembles  that  of  the  relative  impor- 
tance to  plant  growth,  in  a  given  situation,  of  various  elements 
in  soil  fertility ;  of  the  relative  importance  to  animal  growth, 
in  a  given  ration,  of  the  various  elements  of  animal  nutrition ; 


LABOR  PROGRAMS  687 

of  the  relative  importance  to  farm  production,  in  a  given  com- 
bination of  productive  factors,  of  different  items  in  the  equip- 
ment. It  is  a  question  of  physical  fact  which  could,  in  any 
case,  be  determined  by  physical  experimentation  if  anyone  were 
willing  to  go  to  the  expense  of  running  the  experiment  station. 

A  question  of  more  or  less.  This  is  always  a  question  of  hav- 
ing more  or  less  of  a  given  element,  and  not  of  having  some  or 
none  of  it,  in  a  given  combination.  In  a  given  soil  it  is  a  ques- 
tion of  the  importance  of  having  more  or  less  nitrogen,  not  a 
question  of  having  some  nitrogen  or  none  at  all,  which  interests 
the  real  farmer.  The  "  flower-in-the-crannied-wall "  philosopher 
would  doubtless  say  that,  (t absolutely  speaking,"  or  in  terms  of 
the  "higher  logic,"  nitrogen  is  no  more  important  to  plant 
growth  than  silica  or  a  number  of  other  soil  ingredients.  The 
scientific  farmer  knows  that  his  soil  generally  contains  all  the 
silica  his  crops  can  possibly  use,  and  some  more  besides,  and  that 
therefore  it  would  not  be  good  economy  to  buy  any  more.  He 
also  knows  that  in  most  soils  there  is  less  available  nitrogen 
than  his  crops  can  use  and  that  a  little  more  nitrogen  would  be 
followed  by  a  little  more  crop.  When  he  is  certain  of  that,  the 
kind  of  logic  which  he  needs  in  his  business  will  lead  him  to  buy 
nitrogen  provided  its  price  is  not  above  that  of  the  expected 
increase  in  his  crop. 

A  fertilizer  company  has  recently  been  in  actual  operation 
in  New  England,  trying  to  sell  a  fertilizer  containing  none  of 
the  elements  of  plant  food  which  farmers  ordinarily  buy,  but 
very  rich  in  silica ;  that  is,  sand !  This  company  published 
statements  of  scientific  men  to  the  effect  that  plants  require 
silica  for  their  best  growth.  It  could  probably  have  been  demon- 
strated that  a  soil  absolutely  devoid  of  silica  would  not  grow 
crops  at  all.  Therefore,  some  would  argue,  silica  is  the  great 
producer  of  crops.  This  argument  might  be  sufficient  to  satisfy 
the  demands  of  the  "higher  logic,"  but  it  was  not  sufficient  to 
satisfy  the  demands  of  scientific  farmers,  nor  did  it  prove  to 
be  sufficient  to  satisfy  the  court  nor  to  keep  the  promoters  of 
this  company  out  of  jail. 


688  PRINCIPLES  OF  NATIONAL  ECONOMY 

It  was  suggested  above  that  while  institutions  could  have 
very  little  direct  influence  upon  a  problem  of  this  kind,  they 
could  have  considerable  indirect  influence.  In  a  community 
where  soils  need  more  nitrogen  to  secure  better  crops  but  do 
not  need  more  silica,  institutions  could  scarcely  succeed  directly 
in  giving  nitrogen  and  silica  equal  values.  They  might  succeed 
indirectly  if  they  could  set  forces  to  work  which  would  make 
soil  nitrogen  as  abundant  as  silica,  or  silica  as  scarce  as  soil 
nitrogen.  In  a  community  where  foods  rich  in  protein  were 
physically  scarce  relatively  to  needs,  whereas  foods  rich  in 
starch  were  physically  abundant,  institutions  could  scarcely 
succeed  directly  in  giving  equal  values  to  various  kinds  of  food. 
If  the  government  or  any  other  institution  could  set  forces  to 
work  which  would  make  different  kinds  of  food  equally  abun- 
dant or  equally  scarce,  the  equality  of  values  would  take  care  of 
itself.  Such  a  program  could  properly  be  called  a  balancing-up 
program. 

The  balancing-up  program.  This  balancing-up  program  may 
be  vastly  extended.  Governments,  schools,  and  other  institu- 
tions may  easily  set  forces  to  work  which  will  accelerate  the 
accumulation  of  capital  and  eventually  make  it  so  abundant 
relatively  to  land  and  labor  as  to  give  capital  a  smaller  and 
labor  or  land  a  larger  share  in  distribution.  That  is  what  a 
thrift  campaign  is  for.  Forces  may  also  be  set  to  work  which 
will  spread  population  over  wider  areas,  reduce  the  intensity  of 
the  demand  for  favored  locations,  and  reduce  rent,  leaving 
larger  shares  to  the  other  factors.  It  would  be  very  easy  to  set 
forces  to  work  which  would  reduce  the  number  of  unskilled 
laborers  and  increase  the  supply  of  employing  talent.  This 
would  automatically  result  in  some  approach  to  equality, — at 
least  it  would  result  in  higher  wages  for  unskilled  labor  and 
lower  incomes  for  the  employing  classes.  If  carried  far  enough 
a  balancing-up  program  would  give  us  something  approximating 
to  equality  of  income  without  sacrificing  individual  freedom. 

Equality  with  liberty.  A  social  system  in  which  each  free  in- 
dividual made  his  own  business  adjustments  on  the  basis  of 


LABOR  PROGRAMS  689 

voluntary  agreement  with  other  free  individuals  and  where,  in 
addition  to  this  universal  freedom,  there  was  universal  and 
approximately  equal  prosperity  would  certainly  be  more  desir- 
able than  a  system  which  secured  liberty  without  equal  pros- 
perity or  equal  prosperity  without  liberty.  The  balancing-up 
program  is  the  only  program  which  can  possibly  give  us  both. 
All  other  programs  sacrifice  one  or  the  other. 

Thrift.  In  order  to  make  capital  so  abundant  as  to  reduce 
the  share  of  the  capitalist  class  and  increase  the  share  of  the 
laboring  class  we  need,  first  and  foremost,  a  general,  aggressive, 
and  permanent  thrift  campaign.  The  twin  virtues  of  thrift 
and  industry  have  been  very  unequally  cultivated  in  almost 
every  community.  While  thrift  is  quite  as  important  as  industry 
to  national  prosperity,  it  has  by  no  means  received  the  encour- 
agement that  industry  has  received.  Training  for  industry  has 
been  provided  at  public  and  private  expense,  and  every  kind 
of  social  and  moral  pressure  has  been  brought  to  bear  upon  the 
young  to  be  industrious.  No  one  has  commended  the  idle  man, 
but  many  have  commended  thriftlessness  and  extravagance. 
Advertisers  and  salesmen  have  never  exercised  their  arts  and 
blandishments  to  induce  men  to  be  idle,  but  they  have  done 
much  to  induce  men  to  be  thriftless  and  extravagant.  Only  a 
few  agencies  have  been  working  effectively  to  induce  men  to 
save  and  invest  their  incomes.  One  very  important  step  would 
be  taken  toward  balancing  things  up  if  as  many  encouragements 
and  temptations  and  as  much  social  and  moral  pressure  could 
be  brought  to  bear  upon  men  to  induce  them  to  save  as  are  now 
brought  to  bear  to  induce  them  to  work. 

It  is  almost  as  great  a  help  to  industries  when  citizens  invest 
largely  in  industrial  bonds  as  it  is  in  war  when  citizens  invest 
largely  in  government  bonds.  In  the  one  case  an  abundance  of 
capital  is  secured  for  the  equipment  of  industries ;  in  the  other 
case  an  abundance  is  secured  for  the  equipment  of  war  enter- 
prises and  paying  the  war  expenses.  Those  communities  and 
nations  in  which  large  numbers  are  investing  in  industrial  enter- 
prises are  the  communities  or  nations  whose  industries  will 


690  PRINCIPLES  OF  NATIONAL  ECONOMY 

grow  and  expand  and  in  which  there  will  be  ample  employment 
for  labor  of  all  kinds.  Let  us  suppose  that  two  communities 
have  equal  incomes  and  are  able  to  spend  equal  amounts  of 
money  this  year  in  purchasing  goods  or  hiring  labor  to  make 
goods.  Let  us  suppose  that  Community  A  spends  all  its  clear 
income  this  year  on  consumers'  goods,  spending  only  enough 
on  producers'  goods  to  keep  its  supply  of  capital  intact,  whereas 
Community  B  spends  half  its  clear  income  this  year  on  pro- 
ducers' goods  and  only  half  on  consumers'  goods.  There  will 
be  as  many  goods  purchased  this  year  and  as  much  labor  em- 
ployed in  Community  B  as  in  Community  A.  The  difference 
will  be  that  half  the  available  labor  power  in  Community  B 
will  be  employed  in  making  producers'  goods,  whereas  all  the 
available  labor  power  in  Community  A  will  be  employed  in 
making  consumers'  goods. 

Next  year,  however,  Community  B  will  be  better  equipped 
with  producers'  goods  than  Community  A.  Its  total  product 
(that  is,  its  real  income)  will  be  larger  than  Community  A's. 
It  will  have  more  to  spend  and  will  be  able  to  employ  more 
labor  or  employ  it  to  better  advantage.  If  it  continues  spending 
half  its  enlarged  income  in  producers'  goods,  adding  largely 
to  its  productive  equipment  from  year  to  year,  it  will  out- 
strip Community  A  and  leave  it  farther  and  farther  behind. 
In  a  short  time  laborers  from  Community  A  will  be  migrat- 
ing to  Community  B,  where  there  are  more  employment  and 
better  wages. 

The  different  items  in  a  balancing-up  program  need  not  be 
discussed  in  detail.  They  will  be  considered  in  detail  in 
Chapter  LVI. 

The  collective-bargaining  program.  The  indispensable  man 
can  generally  get  what  he  wants  by  the  method  of  voluntary 
agreement.  The  superfluous  man  will  have  difficulty.  To  the 
man  who,  in  any  industrial  situation,  is  indispensable,  freedom 
means  freedom  to  prosper.  To  the  superfluous  man  freedom 
may  mean  freedom  to  starve  and  is  pretty  certain  to  mean 
freedom  to  be  relatively  unprosperous. 


LABOR  PROGRAMS  691 

Any  industrial  condition  in  which  one  man  is  indispensable 
and  another  superfluous  is  necessarily  an  unbalanced  condition. 
No  man  is  indispensable  if  there  are  plenty  of  others  who  can 
do  the  same  kind  of  work  that  he  does.  No  man  is  superfluous 
unless  there  are  more  than  are  needed  to  do  the  kind  of  work 
which  he  can  do.  A  situation  in  which  no  class  of  men  was  so 
small  as  to  make  any  one  indispensable  and  no  class  so  large  as 
to  make  any  one  superfluous  would  be  a  better-balanced  situa- 
tion. One  in  which  more  men  were  about  equally  needed  in 
every  occupation  would  be  perfectly  balanced. 

It  has  already  been  pointed  out  that  even  in  an  unbalanced 
situation,  while  the  individual  in  a  large  class  may  be  super- 
fluous, the  class  as  a  whole  is  indispensable.  There  may,  for 
example,  be  so  many  ditch-diggers  as  to  make  any  individual 
among  them  superfluous ;  nevertheless,  ditch-diggers  as  a  class 
may  be  indispensable.  The  superfluous  individual,  bargaining 
alone,  is  weak  and  can  never,  so  long  as  he  is  superfluous,  bar- 
gain to  his  own  advantage.  The  indispensable  class,  if  it  can 
bargain  as  a  unit,  can  take  advantage  of  its  indispensability  and 
bargain  to  its  own  advantage.  Therein  lies  the  philosophy  of 
the  collective-bargaining  program. 

Its  reason  for  existence  is  found,  however,  in  an  unbalanced 
industrial  system.  A  kind  of  labor  which  is  scarce  enough  to 
make  each  individual  laborer  practically  indispensable  would 
not  need  collective  bargaining.  Individual  bargaining  would 
give  him  his  full  share  in  the  general  prosperity.  To  use 
collective  bargaining  to  add  still  more  to  that  prosperity  would 
not  be  a  means  of  defense  but  a  means  of  extortion.  It  would 
not  differ  in  any  essential  particular  from  the  trust,  and  the 
public  would  soon  become  as  impatient  of  collective  bargaining 
on  its  part  as  it  has  already  become  of  collective  bargaining 
on  the  part  of  the  trust. 

Where  the  lack  of  balance  among  the  factors  of  production 
is  not  so  very  extreme  (that  is,  where  there  is  no  great  over- 
abundance of  one  factor  and  no  great  scarcity  of  another), 
collective  bargaining  on  the  part  of  those  who  sell  the  overabun- 


692  PRINCIPLES  OF  NATIONAL  ECONOMY 

dant  factor  is  a  sufficient  remedy.  That  happens  to  be  the  situ- 
ation in  the  United  States  with  respect  to  most  forms  of  skilled 
manual  labor.  Skilled  laborers  are  not  so  numerous  as  to 
place  them  at  any  great  disadvantage  in  the  bargaining  process. 
Such  disadvantage  as  they  suffer  can  generally  be  overcome  by 
the  simple  process  of  collective  bargaining.  They  are  not 
strongly  tempted  to  adopt  either  the  voting  or  the  fighting  pro- 
gram :  first,,  because  they  have  no  such  grievance  as  would  jus- 
tify their  surrender  of  individual  freedom;  second,  because 
they  are  not  numerous  enough  to  give  them  much  voting  or 
fighting  power. 

The  voting  program.  Generally  speaking,  the  more  numer- 
ous any  industrial  class  happens  to  be,  the  weaker  its  members 
are  in  the  process  of  bargaining  on  the  free  and  open  market. 
But  the  numbers  which  make  them  weak  in  bargaining  make 
them  strong  in  voting.  On  the  market  they  are  at  a  disadvan- 
tage ;  in  politics  they  are  at  an  advantage.  The  greater  their 
weakness  on  the  market,  the  greater  their  voting  strength 
in  politics. 

As  stated  above,  where  the  disproportion  of  numbers  is  not 
so  very  great,  the  disadvantage  in  bargaining  is  likewise  not  so 
very  great,  neither  is  their  voting  strength  so  very  great.  Under 
such  circumstances  the  voting  program  does  not  seem  to  be 
necessary  nor  does  it  promise  much  success.  Collective  bargain- 
ing is  the  only  logical  program.  But  where  the  disproportion  is 
very  great  the  voting  program  seems  to  be  more  of  a  necessity 
and,  what  is  more  to  the  point,  promises  greater  success. 

In  a  community  where  any  class  of  wageworkers,  say  un- 
skilled laborers,  outnumbers  all  other  people  the  oversupply  of 
unskilled  workers  will  make  their  position  on  the  labor  market 
very  difficult.  Even  collective  bargaining  has  its  limits,  mainly 
because  of  the  difficulty  of  keeping  so  large  a  mass  together  in 
order  to  bargain  as  a  unit.  But  since  they  outnumber  all  others 
their  voting  strength  is  overwhelming  if  they  can  be  induced  to 
vote  as  a  unit.  They  could  easily  control  the  state,  elect  the 
entire  personnel  of  government,  and  use  the  compulsory  power 


LABOR  PROGRAMS  693 

of  the  government  to  gain  their  own  ends.  As  a  matter  of  fact 
they  would  not  even  have  to  take  the  initiative.  Candidates 
for  the  salaries  and  emoluments  of  public  office  would  certainly 
appreciate  their  opportunities.  They  would  seek  the  votes  of 
this  class  which  had  so  many  votes  to  give,  by  offering  it  every- 
thing it  wanted,  even  more  than  it  had  the  courage  to  ask  for. 
The  voting  program  is  therefore  almost  a  certainty  in  any 
community  where  the  disproportion  of  occupational  classes 
is  very  great. 

This  will  explain  why  the  dominant  elements  in  American 
trade-unionism  have  always  stood  for  a  collective-bargaining 
rather  than  for  a  voting  program.  They  have  not  needed  to 
control  the  state  in  order  to  gain  fairly  good  wages  for  them- 
selves, and,  moreover,  they  have  not  had  votes  enough  to  control 
the  state  even  if  they  had  wanted  to.  It  will  also  explain  why 
English  laborers  have  adopted  a  voting  program.  The  dispro- 
portion between  wageworkers  and  other  factors  of  production, 
or  other  elements  in  the  population,  is  much  greater  there  than 
here.  In  bargaining,  English  laborers  are  as  a  class  therefore 
weaker  and  in  voting  stronger  than  American  laborers.  Eng- 
lish laborers  therefore  have  greater  need  of  the  help  of  the 
state  and  greater  power  to  gain  control  of  the  state  than  have 
American  laborers.  The  sheer  logic  of  this  situation  calls  for 
a  greater  trend  toward  socialism  there  than  here. 

Other  classes  besides  laborers  have  shown  the  same  tendency 
to  use  the  state  to  help  them  out  of  a  situation  in  which  their 
bargaining  power  was  reduced.  In  the  seventies  and  eighties 
of  the  last  century  there  was  a  disproportionate  production  of 
agricultural  crops  in  this  country.  The  rapid  settlement  of  the 
rich  prairies  of  the  West  had  poured  a  flood  of  agricultural 
products  upon  the  markets  of  the  world.  This  put  the  farmers 
at  a  disadvantage  on  the  free  and  open  market.  Their  numbers 
proved  to  be  their  weakness  on  the  market  but  their  strength  at 
the  polls.  They  were  not  slow  to  realize  the  situation  and  to 
use  their  voting  strength  rather  than  their  bargaining  weakness. 
Even  if  they  had  been  slow  to  realize  it,  they  were  abundantly 


694  PRINCIPLES  OF  NATIONAL  ECONOMY 

reminded  by  a  swarm  of  candidates  for  office  who  had  uses  for 
the  large  farmer  vote.  Since  the  beginning  of  the  present  cen- 
tury the  farmers  have  not  been  so  numerous  relatively  to  the 
rest  of  the  population  as  to  be  placed  at  a  great  advantage 
at  the  polls.  In  fact,  the  rural  population  is  now  less  than  the 
urban.  Consequently  the  wiser  farmers  are  not  now  demand- 
ing so  much  help  from  the  government.  At  the  same  time 
the  candidates  for  high  public  office  have,  except  in  the  far 
Northwest,  almost  forsaken  the  farmer  and  have  become  very 
solicitous  of  the  labor  vote. 

There  was  also  a  time  when  the  manufacturers — especi- 
ally those  starting  new  lines  of  manufacturing — felt  weak  on 
the  market,  or  thought  that  they  did  when  brought  into  com- 
petition with  old  and  well-established  rivals  across  the  water. 
They  then  turned  to  the  state  for  help.  They  were  able  to 
deliver  considerable  numbers  of  votes.  The  result  was  that 
candidates  for  office  became  solicitous  as  to  the  welfare  of 
infant  industries. 

In  England  after  the  Black  Death,  when  labor  was  scarce 
and  hard  to  find,  laborers  were  strong  in  bargaining,  but  weak 
in  voting  because  they  had  no  votes.  The  employing  classes 
were  temporarily  weak  in  bargaining  but  strong  in  voting,  since 
they  did  whatever  voting  was  done.  At  any  rate  they  controlled 
the  government.  They  were  not  slow  to  use  the  government  to 
help  themselves  in  the  bargaining  process  by  passing  stringent 
laws  for  the  regulation  of  wages. 

In  view  of  all  these  experiences  it  is  pretty  certain  that  any 
class  which  finds  itself  so  numerous  as  to  be  weak  in  bargaining 
and  strong  in  voting  will  make  use  of  a  voting  program.  It  is 
not  so  certain,  judging  by  past  and  present  experience,  that  it 
will  use  its  voting  power  wisely.  In  fact,  no  case  has  yet 
appeared  where  a  voting  program  adopted  under  such  condi- 
tions was  not  destructive  rather  than  constructive ;  which  was 
not  demagogic  rather  than  economic ;  which  did  not  consist  in 
killing  the  goose  that  laid  the  golden  eggs,  in  order  to  seize  the 
whole  stock,  rather  than  in  increasing  the  flock.  But  that  is 


LABOR  PROGRAMS  695 

not  the  important  certainty.  The  important  certainty  is  that 
wherever  and  whenever  such  an  unbalanced  condition  is  al- 
lowed to  arise  as  that  which  exists  in  England  today,  a  voting 
program  similar  to  that  which  has  been  paraded  in  this  country 
as  the  program  of  the  British  Labor  Party  is  certain  to  be 
adopted.  Though  it  lacks  a  single  constructive  feature,  though 
it  is  made  up  exclusively  of  scraps  of  Marxian  jargon,  catch 
phrases,  and  shibboleths,  nevertheless  it  is  the  kind  of  pro- 
gram which  any  class  is  likely  to  adopt  in  its  own  interest  when 
it  for  the  first  time  concludes  that  it  can  outvote  other  classes 
and  control  the  state. 

The  fighting  program.  It  is  sometimes  affirmed  that  the  labor 
program  in  England  is  more  " advanced"  than  that  of  the 
American  laborers.  By  the  same  token  the  program  of  the 
Russian  laborers  is  more  " advanced"  than  that  of  the  British. 
The  disproportion  of  the  wageworkers  to  other  urban  classes 
is  also  greater  in  Russia  than  in  England,  as  it  is  in  England 
than  in  the  United  States.  That  is  to  say,  there  are  fewer  tech- 
nicians, business  men,  capitalists,  and  also  smaller  accumula- 
tions of  productive  capital  and  fewer  productive  establishments 
calling  for  men,  in  proportion  to  the  number  of  men  available 
to  run  them,  in  Russia  than  in  England,  and  in  England  than 
in  the  United  States.  This  disproportion  puts  the  Russian 
laborers,  particularly  the  great  mass  of  ignorant  and  unskilled 
laborers,  at  a  still  greater  disadvantage  in  bargaining,  but 
gives  them  vastly  greater  strength  in  other  ways. 

Numbers  give  strength  not  only  in  voting  but  also  in  fighting. 
Fighting,  provided  victory  is  certain  and  overwhelming,  is  a 
shorter  cut  to  what  is  wanted  than  voting.  To  be  sure  it  may, 
like  other  short  cuts,  not  work  well  in  the  long  run,  but  it  looks 
like  a  quicker  method  of  getting  possession  of  accumulated 
wealth  than  the  voting  program,  as  the  voting  program  is  quicker 
than  the  program  of  industry,  thrift,  and  sound  investing. 

Where  the  numerical  strength  of  the  wageworkers  is  not 
overwhelming,  fighting  may  prove  expensive  even  though  ulti- 
mate success  looks  pretty  certain.  Voting  looks  like  a  cheaper 


696  PRINCIPLES  OF  NATIONAL  ECONOMY 

program  than  killing.  But  where  numerical  strength  is  so  over- 
whelming as  to  make  victory  in  fighting  not  only  certain  but 
cheap,  because  of  the  absence  of  power  of  effective  resistance  on 
the  part  of  other  classes,  the  fighting  program  is  pretty  certain 
to  be  adopted,  provided  there  is  no  moral  restraint  or  economic 
wisdom  to  lead  people  to  adopt  a  more  constructive  program. 

It  is  useless  to  point  out  to  a  great  mass  of  ignorant  and 
unskilled  labor  that  even  though  they  have  the  power  to  take 
possession,  with  very  little  fighting,  of  the  accumulated  wealth 
of  the  country,  still  they  would  better  not  do  it  because,  in  the 
long  run,  they  will  lose  more  than  they  will  gain  by  it.  If  they 
were  capable  of  appreciating  such  arguments  they  would  not  be 
ignorant  and  unskilled  laborers.  Men  are  not  ignorant  and 
unskilled  laborers  in  industry  and  at  the  same  time  farsighted 
statesmen  in  politics.  They  are  just  as  ignorant  and  short- 
sighted with  respect  to  public  as  with  respect  to  private  affairs. 
There  is  therefore  no  safeguard  against  the  fighting  program 
except  the  prevention  of  the  development  of  a  large  class  of 
ignorant  and  unskilled  laborers.  If  such  a  class  exists,  there 
will  be  trouble  ;  if  it  does  not  exist,  there  will  not  be  any  danger 
of  a  fighting  labor  program. 

Therefore  we  may  conclude  that  whenever  and  wherever  a 
nation  becomes  so  unbalanced  occupationally  as  Russia,  the 
fighting  program  is  certain  to  be  the  dominant  labor  program. 
In  short,  we  in  this  country  can  have  any  one  of  these  four 
programs  which  we  choose  to  have.  If  we  balance  things  up 
none  of  the  other  programs  will  become  dominant  or  dangerous. 
If  things  become  slightly  unbalanced  some  kind  of  collective- 
bargaining  program  is  certain  to  grow  out  of  the  situation.  If 
they  become  somewhat  more  unbalanced  a  voting  program  is 
certain  to  become  the  dominant  program  supported  by  the  nu- 
merically superior  class,  whose  numerical  superiority  makes  it 
weak  on  the  market  but  strong  at  the  polls.  If  they  become  still 
more  unbalanced  the  numerically  superior  class,  finding  itself 
hopelessly  weak  on  the  market  but  overwhelmingly  strong  in  the 
use  of  physical  force,  will  use  its  strength  to  take  what  it  wants. 


KINDS  OF 
SOCIALISM 


CHAPTER  LI 
SOCIALISM 

f  Religious 

Fulminatious 
f  Idealistic  •!  Utopian 

„,  ,  Experimental 

Types  of 

,   -;  i  Opportunist 

propaganda  1 

f  Political 

[  Marxian  -|  f  Syndicalist 

[  Militant  J  Bolshevist 

[The  l.W.W. 


f  Ownership  acquired  by 

f  ~  ,.  purchase 

[  General   state  ownership  •<  _ 

Ownership  acquired  by 

Socialistic  force 

programs  I  f  Ownership  acquired  by 

I  Ownership  by  groups  of  J       purchase 
[      workers  I  Ownership  acquired  by 

[      force 

An  authoritarian  program.  The  most  widespread  of  the  va- 
rious authoritarian  movements  is  that  which  goes  under  the 
name  of  socialism.  It  has  never  received  the  support  of  a  major- 
ity of  the  voters,  or  even  a  large  minority,  in  any  country ;  but 
it  has  a  vigorous  organization  of  propagandists  in  practically 
every  country.  The  only  real  victories  it  has  won  have  been 
those  of  physical  force,  where,  as  in  Russia  and,  for  a  short  time, 
as  in  Hungary,  a  violent  minority  cowed  the  majority  into  sub- 
mission. Even  the  violent  minority  in  Russia,  when  faced  with 
the  necessity  of  producing  enough  to  feed  and  clothe  the  people, 
was  forced  to  give  up  most  of  its  socialism  and  return,  in  part 
at  least,  to  private  property,  especially  in  land.  Because  of  the 
activity  of  its  advocates  and  the  vigor  of  its  propaganda, 
it  is  necessary  to  understand  what  socialism  is  and  what  its 

advocates  are  driving  at. 

697 


698  PRINCIPLES  OF  NATIONAL  ECONOMY 

"Socialism"  and  "communism"  have  shifted  meanings.  The 
term  "socialism"  has  a  variety  of  meanings,  though  there  are 
certain  elements  common  to  every  definition.  During  the  last 
seventy-five  years  the  meanings  attached  to  "  socialism"  and 
"communism"  have  been  shifted.  That  which  is  now  known  as 
socialism  was  formerly  known  as  communism.  Karl  Marx,  who 
is  regarded  as  the  great  apostle  of  modern  socialism,  called  him- 
self a  communist.  On  the  other  hand,  "socialism"  was  applied 
to  general  schemes  for  social  amelioration  which  did  not  involve 
any  fundamental  change  in  the  organization  of  society.  Com- 
munism, however,  fell  into  disrepute,  and  its  followers  dis- 
carded the  name  and  began  calling  themselves  socialists. 
Since  the  World  War  socialism  has,  in  turn,  fallen  into  dis- 
repute and  communism  is  again  the  dominant  form  of 
revolutionary  propaganda. 

There  is  a  tendency  for  partisans  of  any  program  or  move- 
ment to  define  their  program  in  the  most  favorable  terms 
possible.  This  applies  to  socialists  as  well  as  to  other  propagan- 
dists. Sometimes  this  tendency  leads  to  a  definition  of  social- 
ism which  does  not  define,  but  which  includes  the  opponents 
as  well  as  the  proponents  of  socialism.  When  it  is  said,  for 
example,  that  socialism  teaches  the  doctrine  that  only  he  who 
produces  shall  consume,  it  may  be  replied,  "So  also  does  in- 
dividualism"— and  practically  every  other  ism  that  has  any- 
thing to  do  with  the  production  and  distribution  of  wealth. 
When  it  is  said  that  socialism  teaches  the  doctrine  of  equality 
of  opportunity  it  may  be  replied,  "So  also  does  individualism" 
—and  all  the  other  isms. 

The  difference  between  a  socialist  and  a  nonsocialist.  In  order 
to  define  socialism  we  must  find  something  which  will  com- 
pletely distinguish  the  socialist  from  the  nonsocialist.  The 
only  definition  that  will  do  this  is  the  following :  A  socialist  is 
one  who  believes  that  the  community,  the  public,  or  the  govern- 
ment should  own  and  operate  the  means  of  production,  leaving 
to  individuals  the  ownership  of  most  articles  of  consumption. 
By  the  means  of  production  are  meant  practically  all  that  is 


SOCIALISM  699 

included  under  the  names  "land"  and  "capital," — farms,  fac- 
tories, railroads,  mercantile  houses,  and  office  buildings  would 
all  be  included ;  under  the  program  of  socialism  all  these  things 
would  be  owned  and  operated  by  the  community,  the  public,  or 
the  government.  This  would  mean  that  almost  every  individual 
would  be  in  the  employ  of  the  government  in  one  way  or  an- 
other. Since  there  would  be  no  private  enterprise,  no  one  could 
start  a  farm,  a  factory,  a  store,  or  any  business  enterprise  of 
his  own.  Since  no  one  could  start  any  such  enterprise,  no  one 
could  be  employed  by  a  private  employer.  Since  no  one  could 
be  either  in  his  own  employ  or  in  the  employ  of  any  private 
organization,  everyone  who  expected  an  income  would  have  to 
be  in  the  employ  of  the  government. 

There  is  some  difference  of  opinion  among  socialists  as  to 
how  far  this  principle  of  government  ownership  and  operation 
should  extend.  Some  profess  to  be  willing  to  stop  with  trusts 
and  monopolies.  This,  however,  is  populism  rather  than  so- 
cialism. It  is  based  not  on  a  theory  of  capital  but  on  a  theory 
of  monopoly.  Many  people  who  favor  the  private  ownership  of 
capital  are  opposed  to  monopoly  and  believe  that  the  best  way 
to  curb  monopoly  is  to  turn  all  monopolistic  enterprises  over 
to  the  state.  Such  a  person  might  utterly  reject  all  socialistic 
theories  respecting  capital.  Moreover,  every  thoroughgoing 
socialist  really  bases  his  conclusions  on  his  theory  of  capital. 
The  work  of  Karl  Marx,  on  "Capital,"  has  been  called  the 
Bible  of  the  modern  socialist.  This  book  pays  very  little  atten- 
tion to  the  question  of  monopoly ;  it  consists  almost  entirely  of 
an  attack  upon  capital  and  capitalistic  production.  From  Marx's 
point  of  view  it  is  not  monopolized  capital,  but  capital  as  such, 
that  gives  its  owner  the  power  to  exploit  and  defraud  other  peo- 
ple. The  capital  belonging  to  a  farmer  as  well  as  that  belonging 
to  a  great  trust,  to  a  small  manufacturer  as  well  as  to  a  large 
manufacturer,  to  the  driver  of  a  jitney  bus  as  well  as  to  a  street- 
car company,  is  to  be  owned  and  operated  by  the  public. 

Socialism  is  not  populism.  On  the  other  hand,  the  slogan 
"Let  the  nation  own  the  trusts"  has  nothing  to  do  with  capital 


700  PRINCIPLES  OF  NATIONAL  ECONOMY 

as  such.  Such  a  program  is  based  entirely  on  a  theory  of 
monopoly,  which  is  the  essence  of  populism  rather  than  of 
socialism.  Those  who  hold  to  this  doctrine  may  quite  con- 
sistently hold  to  the  idea  that  capital  which  is  not  monopolized 
is  a  help  rather  than  a  hindrance  to  labor,  that  he  who  accumu- 
lates capital  by  consuming  less  than  his  income  is  benefiting 
rather  than  injuring  labor,  and  that  therefore  everybody  ought 
to  be  encouraged  to  accumulate  capital  and  invest  it  in  produc- 
tive enterprises.  From  this  point  of  view  the  individual  who 
has  accumulated  capital  and  invested  it  in  a  productive  enter- 
prise has  not  only  increased  the  productivity  of  the  community 
but  is  entitled  to  some  reward  for  that  service  which  he  has 
performed.  This  reward  would  be  called  interest.  The  populist, 
therefore,  would  approve  of  the  receipt  of  interest  on  the  part 
of  the  owner  of  unmonopolized  capital. 

All  the  great  authoritative  books  on  socialism  are  funda- 
mentally opposed  to  interest  or  to  anyone's  receiving  any  in- 
come in  the  form  of  interest.  If  labor  is  the  only  producer  of 
wealth,  the  saver  and  accumulator  is  not  a  producer  and  is 
therefore  not  entitled  to  any  share  in  the  product.  Since  in- 
terest is  the  share  which  goes  to  the  accumulator  and  investor, 
it  cannot  be  justified  under  the  socialistic  philosophy. 

Difference  between  a  socialist  and  a  liberalist.  The  defini- 
tion of  a  socialist  as  one  who  believes  in  the  common,  public, 
or  government  ownership  of  all  the  means  of  production  sepa- 
rates the  socialist  not  only  from  the  populist  and  the  com- 
munist but  from  the  liberalist  as  well.  Moreover,  this  is  the 
only  definition  which  will  at  all  distinguish  the  socialist  from 
the  liberalist.  The  liberalist  is  quite  as  desirous  of  economic 
justice  and  of  equality  of  opportunity  as  the  socialist,  but 
he  believes  that  the  liberalistic  program  is  better  adapted  to 
the  securing  of  those  ends  than  is  the  socialistic  program.  The 
liberalistic  program  permits  the  private  ownership  of  capital, 
and  it  also  permits  the  receipt  of  interest  as  a  private  reward, 
on  the  ground  that  the  accumulation  of  capital  is  a  produc- 


SOCIALISM  701 

tive  service, — not  that  it  is  philanthropic,  but  that  it  is  useful 
to  society. 

In  order  to  becloud  the  issue  it  is  sometimes  stated  that  the 
socialist  believes  that  men  should  be  paid  for  doing  things  and 
the  liberalist  that  men  should  be  paid  for  owning  things.  The 
liberalist  does  not  believe  that  men  should  be  paid  for  owning 
things  unless  the  ownership  is  a  symptom  of  their  having  done 
something  which  was  useful.  If  two  men,  A  and  B,  have  been 
doing  equally  good  work  with  their  hands  and  their  heads  and 
have  earned  equal  incomes  they  should  be  paid  the  same,  ac- 
cording to  the  liberalist  as  well  as  the  socialist.  If,  however,  A 
consumes  all  his  income,  but  B  invests  a  part  of  his  in  the  tools 
of  production,  the  liberalist  believes  that  B  has  done  better 
than  A.  If  everybody  did  as  A  does,  the  nation's  stock  of  tools 
would  never  increase ;  if  everybody  did  as  B  does,  the  nation's 
stock  of  tools  would  increase  rapidly.  The  more  citizens  it 
has  of  the  B  type,  the  more  prosperous  will  the  nation  become ; 
the  more  it  has  of  the  A  type,  the  less  prosperous  it  will  be- 
come. It  is  very  important  that  men  should  be  encouraged  to 
join  the  ranks  of  the  B's  rather  than  of  the  A's.  The  liberalist 
therefore  holds  that  there  should  be  some  inducement  to  men 
to  do  what  B  has  done  ;  namely,  to  invest  a  part  of  their  income 
rather  than  to  consume  it. 

In  the  smartness  of  debate  one  might  still  say  that  B  is 
hereafter  being  paid  for  owning  something,  whereas  A  was 
paid  only  for  doing  something;  but  as  a  matter  of  fact  that 
which  B  appears  to  be  paid  for  owning  is  only  a  deferred  pay- 
ment for  that  which  he  did  before.  When  he  refrained  from 
using  up  his  income  in  riotous  living  and  devoted  it  to  a  useful 
purpose  he  postponed  the  day  of  his  enjoyment  of  his  income. 
It  is  virtually,  therefore,  deferred  payment  for  his  work.  The 
money  which  he  received  for  his  work  was  not  final  payment ; 
the  final  reward  of  every  individual  is  that  which  he  consumes. 
When  B  decided  to  defer  consumption  he  was  really  deferring 
the  receipt  of  his  wages. 


702  PRINCIPLES  OF  NATIONAL  ECONOMY 

There  is  no  other  definition  of  "socialist"  or  " socialism" 
which  will  separate  the  socialist  from  the  nonsocialist  or  which 
will  particularly  separate  him  from  the  liberalist.  The  term 
"liberalist"  is  justified  because  the  liberalist  believes  that,  as  far 
as  possible,  each  individual  should  be  at  liberty  to  start  his  own 
enterprise  if  he  is  so  disposed  or  to  work  for  someone  else  if  he 
prefers;  that  he  should  be  at  liberty  to  work  for  private  in- 
dividuals or  to  work  for  the  government,  according  as  he  can 
make  the  most  satisfactory  voluntary  agreements.  In  short,  the 
liberalist  is  willing  to  trust  men  with  the  power  of  free  con- 
tract, whereas  the  socialist  relies  mainly  on  the  government's 
power  of  compulsion. 

Socialism  involves  more  use  of  the  government's  power  of 
compulsion  than  does  liberalism.  It  has  been  said  that  the 
power  to  tax  is  the  only  capital  the  government  needs.  But  the 
power  to  tax  is  compulsion.  In  order  to  carry  out  a  socialist 
program  the  public  would  have  to  use  its  power  of  compulsion 
in  many  ways.  It  would  have  to  prohibit  competition  by  pri- 
vate individuals  against  the  state  as  it  now  forbids  private 
individuals  to  compete  with  the  post  office  in  the  carrying  of 
first-class  mail.  It  would  have  to  use  its  taxing  power  to  com- 
pel the  payment  of  deficits  whenever  deficits  occurred.  The 
liberalist,  on  the  other  hand,  proposes  to  reduce  to  a  minimum 
the  compulsion  of  the  government  over  the  individual.  An  in- 
dustry which  cannot  be  carried  on  without  any  compulsion 
whatsoever  had  probably  better  be  left  to  die,  unless  it  be 
one  which  is  necessary  for  military  protection.  If  an  individual 
who  desires  to  manufacture  shoes  cannot  manufacture  them 
successfully  without  the  power  of  compulsion,  he  should  not 
manufacture  them  at  all.  If  he  can  buy  his  raw  materials  on 
the  open  market  and  hire  his  labor  on  the  open  market  and 
sell  his  product  on  the  open  market,  making  use  everywhere  of 
voluntary  exchange  and  voluntary  agreement,  and  can  manage 
to  make  a  profit  out  of  his  business  he  is  entitled  to  remain  in 
business.  It  shows  that  he  is  efficient  enough  to  assemble  the 
various  factors  of  production  in  such  a  way  as  to  produce  an 


SOCIALISM  703 

article  which  is  worth  more  than  the  cost  of  those  factors  of 
production.  This  is  highly  economical.  If  in  order  to  make  a 
living  he  had  to  be  paid  out  of  the  public  treasury,  and  the 
public  had  to  make  use  of  its  power  of  taxation  in  order  to  get 
the  wherewithal  to  pay  his  salary,  there  is  a  strong  probability 
that  the  product  would  not  be  worth  as  much  as  the  factors 
which  entered  into  it.  In  that  case  the  power  to  tax  would 
have  to  be  made  use  of  to  keep  the  business  going,  but  the  fact 
that  compulsion  was  necessary  would  be  proof  that  it  ought 
not  to  be  used,  but  that  the  business  should  die  a  natural  death. 

Where  there  is  no  free  bargain  and  sale, — where  consumers 
are  not  at  liberty  to  turn  from  one  producer  to  another  and 
buy  whatever  suits  them  best,  where  tjje  producers  of  raw 
material  are  not  at  liberty  to  sell  to  any  manufacturer  who 
will  pay  them  the  highest  price,  and  where  labor  is  likewise  not 
free  to  bargain  to  its  own  advantage, — there  is  no  assurance 
that  the  maximum  economy  will  be  secured. 

Compulsion  sometimes  necessary.  It  is  not  to  be  inferred, 
however,  that  the  liberalist  is  an  anarchist  and  therefore  op- 
posed to  all  exercise  of  compulsion  or  governmental  power. 
He  is  one  who  believes  that  a  great  many  lines  of  production 
can  be  safely  and  successfully  carried  on  without  the  use  of 
compulsion,  under  voluntary  agreements,  free  contract  and 
sale,  and  individual  initiative.  He  also  quite  frankly  recognizes 
that  there  are  many  things  which  cannot  be  done  in  this  way. 
For  example,  the  forestation  of  certain  mountain  slopes  would 
be  undertaken  by  private  enterprise  only  when  the  enterprisers 
thought  that  it  would  be  profitable  to  them.  But  although  it 
might  be  unprofitable  when  considered  by  itself,  it  might  still 
be  highly  profitable  when  considered  from  the  viewpoint  of 
the  nation  as  a  whole.  If  the  deforestation  of  high  mountain 
slopes  results  in  the  overflow  of  streams  and  the  destruction  of 
valuable  land  along  the  lower  watercourses,  this  is  a  matter 
which  affects  the  country  as  a  whole  but  might  not  interest  the 
individual  owners  of  the  high  slopes.  If  they  found  it  profit- 
able to  cut  off  the  timber  and  sell  it  they  would  do  so  even 


704  PRINCIPLES  OF  NATIONAL  ECONOMY 

though  property  of  much  greater  value  a  few  hundred  miles 
away  on  the  river  bottoms  were  destroyed.  Here  would  be 
a  clear  case  where  government  enterprise  would  be  superior  to 
private  enterprise.  But  similar  reasoning  would  in  some  cases 
prove  the  superiority  of  international  enterprise  over  govern- 
ment enterprise.  It  might  very  well  happen  that  the  high 
mountain  slopes  were  within  the  territory  of  one  nation,  and 
the  river  bottoms  in  the  territory  of  another.  In  that  case 
the  nation  owning  the  high  mountain  slopes  would  have  no 
interest  in  protecting  the  river  bottoms.  Nothing  but  an 
international  arrangement  could  solve  that  problem. 

Again,  take  such  an  enterprise  as  the  building  of  lighthouses. 
The  private  individual  who  built  a  lighthouse  on  a  rocky  coast 
would  scarcely  be  able  to  collect  toll  or  to  get  payment  for  the 
utility  which  he  was  furnishing.  Not  having  the  power  of 
compulsion  he  could  not  force  mariners  to  pay  nor  could  he  tax 
the  public  at  large  in  order  to  build  and  maintain  lighthouses. 
The  public  alone  has  this  power  of  compulsory  collection.  In 
any  other  case  (and  there  are  many  of  them)  where  it  can  be 
shown  that  freedom  of  contract  will  not  succeed  in  getting  an 
important  work  done  or  an  important  utility  produced,  the 
liberalist  is  willing  to  see  compulsion  used. 

"Socialism,"  like  "vegetarianism,"  is  an  exclusive  term.  "Lib- 
eralism" is  therefore  not  an  exclusive  term,  as  "socialism" 
seems  to  be.  In  this  respect  "socialism"  is  like  "vegetarian- 
ism" and  certain  other  exclusive  terms.  One  is  not  a  vegetarian 
by  virtue  of  the  fact  that  one  sometimes  eats  vegetable  food ; 
one  is  a  vegetarian  only  when  one  refuses  to  eat  anything  else. 
A  liberalist  with  respect  to  food  is  willing  to  eat  any  kind  which 
seems  to  him  to  be  desirable,  and  to  permit  others  to  do  the 
same.  In  a  similar  sense  one  is  not  a  socialist  by  virtue  of  the 
fact  that  one  is  willing  that  the  government  should  do  s.ome 
things ;  one  is  a  socialist  only  when  one  believes  that  private 
individuals  should  not  carry  on  any  productive  industry  or  own 
any  productive  capital.  The  liberalist  is  willing  that  industry 
shall  be  carried  on  in  any  way  that  seems  to  promise  desirable 


SOCIALISM  705 

results.  If  an  individual  farmer  can  grow  corn  successfully 
the  liberalist  is  willing  that  he  shall  do  so  and  make  a  profit 
out  of  it ;  if  the  individual  manufacturer  can  manufacture  suc- 
cessfully the  liberalist  is  willing  that  he  shall  do  so  and  likewise 
make  a  profit ;  and  so  on.  He  perhaps  goes  a  step  farther  and 
believes  that  preference  should  be  given  to  free  and  voluntary 
business  arrangements  rather  than  to  compulsion,  and  that  com- 
pulsion should  be  used  only  when  the  voluntary  system  fails  to 
get  desirable  things  done. 

Criticism  always  easy.  As  to  the  merits  of  the  socialistic 
program  as  compared  with  other  programs,  there  will  always  be 
considerable  differences  of  opinion.  It  is  not  difficult  to  point 
out  with  a  great  deal  of  particularity  the  evils  that  result  from 
a  liberalistic  policy.  The  unfortunate  condition  of  those  people 
who  are  not  in  a  position  to  bargain  to  their  own  advantage  is 
perhaps  the  strongest  argument  used  by  the  present-day  social- 
ists. It  is  very  easy  to  find  many  communities  in  which  certain 
classes  of  laboring  men  find  it  impossible  to  get  good  wages  by 
the  method  of  voluntary  agreement,  whereas  other  people  who 
use  this  method  get  larger  incomes  than  are  necessary  or  desir- 
able. This  observation,  however,  is  not  confined  to  labor.  Any- 
one who  is  trying  to  sell  something  with  which  the  market  is 
oversupplied  is  in  a  more  or  less  helpless  position.  When  more 
is  offered  for  sale  than  buyers  care  to  buy,  the  seller  is  very 
dependent,  whereas  the  buyer  is  independent.  Under  the  sys- 
tem of  voluntary  agreement  the  seller  must  take  what  he  can 
persuade  the  buyer  to  pay,  and  the  buyer  can  take  his  choice. 
If,  however,  you  reverse  the  conditions  you  find  buyers  who 
want  to  buy  more  than  sellers  are  willing  to  sell.  Then  buyers 
are  very  dependent ;  they  must  take  whatever  they  can  per- 
suade the  sellers  to  sell,  whereas  sellers  are  independent  and 
can  take  their  choice. 

It  happens  that  certain  kinds  of  labor  seem  to  be  almost 
chronically  in  this  position  of  dependence.  They  always,  and 
rightly,  evoke  sympathy.  There  are  two  ways,  however,  of 
correcting  the  difficulty.  One  is  to  substitute  the  system  of 


706  PRINCIPLES  OF  NATIONAL  ECONOMY 

compulsion  for  the  system  of  voluntary  agreement ;  the  other 
is  to  make  that  kind  of  labor  scarce  and  hard  to  find.  Seeing 
that  these  unskilled  laborers  are  now  beaten  under  the  system 
of  voluntary  agreement,  it  looks  rather  obvious  to  some  people 
that  something  else  must  be  substituted.  But  the  liberalists 
maintain  that  labor  is  not  necessarily,  and  not  always,  at  a  dis- 
advantage under  the  system  of  voluntary  agreement.  If  we 
can  redistribute  the  labor  supply  so  that  there  will  not  be. too 
much  of  one  kind  in  proportion  to  the  other  factors,  then  the 
laborers  will  be  in  a  position  of  great  independence.  It  is  not 
difficult  to  point  out  instances  where  the  laborer  is  independent 
and  the  capitalist  dependent, — where  the  preservation  of  the 
capitalist's  property — where  even  his  income  itself — depends 
on  getting  labor  when  there  is  not  enough  labor  to  go  around. 
In  such  cases  the  capitalist  must  take  whatever  labor  is  of- 
fered, whereas  the  laborer  can  take  his  choice  of  employers. 
There  need  not  be  the  slightest  difficulty  in  creating  such  condi- 
tions for  labor  in  general,  but  it  will  require  the  following  of 
a  program  radically  different  from  that  of  the  socialist.  It 
looks  much  easier  merely  to  exercise  the  compulsory  power  of 
the  state  and  cure  the  difficulty  at  one  stroke.  Not  many  dif- 
ficulties, however,  are  permanently  cured  at  one  stroke  or  by 
the  exercise  of  compulsion. 

Why  there  are  socialists.  When  the  victim  of  a  wasting  sick- 
ness goes  to  a  physician  for  help  he  is  very  likely  to  be  disap- 
pointed. The  physician,  if  he  is  scientific  and  honest,  can 
seldom  promise  him  a  definite  cure.  Being  a  scientific  man 
he  can  point  out  the  causes  which  produce  the  illness  and  say 
that  if  at  some  time  in  the  past  the  patient  had  pursued  differ- 
ent habits  he  would  not  have  become  ill.  This,  however,  is 
cold  comfort  to  the  sick  man,  who  is  suffering  intense  pain. 
Or  the  physician  may  prescribe  a  course  of  treatment  which, 
if  rigidly  followed  for  a  period  of  time,  will  tend  to  remove  the 
causes  of  the  illness  and  eventually  improve  the  patient's  con- 
dition. This  likewise  is  cold  comfort  to  the  man  in  pain,  who 
wants  immediate  relief.  Such  a  man  is  in  a  good  frame  of  mind 


SOCIALISM  707 

to  lend  a  favorable  ear  to  the  " doctor"  with  a  specific  remedy 
who  promises  him  a  specific  cure.  This  is  why  a  certain  type 
of  unscientific  practitioner,  commonly  called  a  quack,  flourishes. 

Similarly,  the  man  who  is  in  the  grip  of  poverty,  as  well  as 
his  sympathizers,'  is  likely  to  be  disappointed  with  the  program 
of  the  economist.  The  economist,  if  he  is  a  scientific  man 
and  honest,  will  be  compelled  to  say  that  there  is  no  immediate 
relief  which  is  not  likely  to  produce  worse  results  in  the 
future.  Being  a  scientific  man  he  can  point  out  the  condi- 
tions which  tend  to  induce  poverty  and  can  prescribe  policies 
which,  if  they  had  been  pursued  consistently  for  a  number  of 
years,  would  have  prevented  the  poverty  which  now  exists. 
This  is  cold  comfort  to  the  man  who  is  already  suffering  from 
poverty  and  longing  for  relief.  Such  a  man  is  in  a  condition 
to  lend  a  favorable  ear  to  the  doctor  with  a  specific  remedy. 
The  obvious  and  specific  remedy  which  is  commonly  used  is 
the  compulsory  power  of  the  state  or  of  the  mass  over  the 
individual.  This  is  sometimes  called  democratic,  but  there  is 
nothing  particularly  democratic  in  compulsion.  One  of  the 
most  democratic  things  in  the  world  is  freedom  of  contract,— 
freedom  on  the  part  of  the  individual  to  pursue  his  own  interests 
so  long  as  they  happen  to  coincide  with  those  of  the  public. 

There  is  a  close  parallelism  between  the  condition  of  the 
laborer  on  the  oversupplied  labor  market  and  the  condition  of 
the  producer  of  vendible  commodities  on  an  oversupplied  com- 
modity market.  In  the  early  nineties  of  the  last  century  farm 
products  were  greatly  oversupplied.  There  had  been  a  rapid 
settlement  of  the  fertile  prairies  of  the  West  and  a  rapid  in- 
crease in  the  tillable  area  on  all  the  farms.  The  result  was 
that  a  great  flood  of  agricultural  products  was  poured  upon  the 
markets  of  the  world,  depressing  prices  not  only  in  this  country 
but  in  Europe  as  well.  In  that  situation  the  farmers  were  in  a 
dependent  condition.  They  had  much  to  sell  and  there  were 
apparently  few  buyers, —  few  at  least  relatively  to  the  amount 
of  produce  that  was  offered.  The  average  farmer  had  to  take 
what  he  could  get.  Naturally  enough  this  situation  created  dis- 


708  PRINCIPLES  OF  NATIONAL  ECONOMY 

satisfaction,  and  demands  were  made  by  the  agricultural  classes 
of  the  South  and  West  for  some  kind  of  compulsory  action 
by  the  government.  On  the  basis  of  free  contract  they  were 
at  a  great  disadvantage  and  not  unnaturally  desired  to  use 
some  other  method,  for  the  time  being  at  least.  Freedom,  to 
them,  frequently  meant  freedom  to  become  bankrupt  and  to 
go  hungry. 

During  the  first  two  decades  of  the  present  century  the  con- 
ditions were  reversed,  and  the  boot  was  on  the  other  foot. 
The  world  was  experiencing  a  great  shortage  of  agricultural 
products.  Buyers  were  everywhere  asking  for  products,  and 
there  appeared  to  be  few  sellers, — few  at  least  relatively  to  the 
number  of  buyers  and  consumers.  The  consumers  were  then 
in  a  position  of  great  dependence,  but  the  farmers  were  in  a 
position  of  great  independence.  On  the  basis  of  free  contract 
the  farmer  had  the  advantage  and  the  consumer  the  disad- 
vantage. The  farmer  was  not  then  heard  calling  for  a  limita- 
tion upon  the  right  of  contract.  He  was  not  demanding  the 
substitution  of  compulsion  for  freedom.  There  were  demands, 
however,  on  the  part  of  consumers  for  government  action  in 
the  fixing  of  prices  and  the  control  of  marketing-processes. 
Since  he  was  at  a  disadvantage  in  the  bargaining  process  the 
consumer  felt  that  something  else  should  be  substituted.  Free- 
dom to  buy  food  did  not  seem  so  very  precious.  Farmers, 
however,  were  then  inclined  to  protest  against  the  substitution 
of  compulsion  for  bargaining ;  that  is,  the  substitution  of  price- 
fixing  by  the  government  for  the  policy  of  letting  demand  and 
supply  determine  the  price.  At  the  present  time,  however, 
(1921),  there  is  a  great  slump  in  the  prices  of  farm  products, 
and  a  good  many  farmers  (it  is  impossible  to  say  how  many) 
are  again  calling  for  government  help  of  various  kinds. 

There  was  a  time  in  England,  following  the  Black  Death, 
when  labor  seemed  to  be  abnormally  scarce  as  compared  with 
what  had  been  known  for  centuries.  The  laborer  was  able  to 
bargain  to  good  advantage.  He  did  not  then  demand  anything 
better  than  free  contract  in  the  determination  of  wages.  The 


SOCIALISM  709 

demand  for  compulsion,  however,  came  from  the  landowners 
and  employing  classes,  and  much  severe  legislation  was  passed 
fixing  wages  and  punishing  attempts  on  the  part  of  laborers  to 
bargain  for  higher  wages. 

Generally  speaking,  however,  in  the  history  of  the  greater 
part  of  the  world,  conditions  have  been  such  that  laborers 
rather  than  employers  have  been  at  a  disadvantage  in  bar- 
gaining. Unskilled  laborers  have  generally  been  abundant. 
It  has  seldom  been  necessary  for  an  employer  to  spend  much 
time  searching  for  men  who  were  willing  to  work  for  him.  The 
searching  has  been  on  the  other  side.  Labor  being  thus  almost 
permanently  oversupplied,  it  has  led  to  a  great  many  demands 
for  the  substitution  of  compulsion  for  free  bargaining  as  a 
means  of  fixing  wages. 

Now  it  is  not  necessary  to  have  a  scourge  in  order  to  thin 
out  the  ranks  of  unskilled  labor.  The  case  of  the  Black  Death 
was  cited  merely  because  governments  have  generally  been  so 
stupid  as  to  do  nothing  about  it,  and  here  was  one  case  where 
a  scourge  proved  to  be  in  some  respects  more  intelligent  and 
generous  than  governments  have  been.  It  is  quite  possible,  by 
the  use  of  a  little  intelligence  and  progressiveness,  to  create 
conditions  under  which  the  demand  for  labor  will  continually 
expand  and  the  supply  of  unskilled  labor  continually  contract, 
putting  the  unskilled  labor  in  a  continually  improving  situation 
with  respect  to  the  bargaining  process,  making  it  continually 
easier  for  the  laborer  to  find  a  job  at  remunerative  wages  but, 
as  a  necessary  consequence,  continually  more  difficult  for  the 
employer  to  find  unskilled  labor  at  low  wages.  By  this  process 
the  system  of  free  contract  could  be  preserved  and  labor  could 
be  made  independent  and  prosperous  at  the  same  time. 

If  this  were  done,  in  all  probability  the  demand  for  com- 
pulsion would  again  come  from  the  employing  classes.  Find- 
ing themselves  at  a  disadvantage  in  the  bargaining  process, 
they  would  seek  government  aid  in  the  fixation  of  wages  by 
compulsion.  That  evil,  however,  could  be  combated  when 
it  arose. 


710  PRINCIPLES  OF  NATIONAL  ECONOMY 

Liberalists  and  authoritarians.  The  reformers  of  our  system 
of  distribution  may  therefore  be  grouped  into  two  main  classes, 
—  the  liberalists  and  the  authoritarians.  The  authoritarians  are 
those  who  wish  to  substitute  some  form  of  compulsion  for  the 
system  of  free  contract.  The  liberalists  are  those  who  prefer 
to  keep  the  system  of  free  and  voluntary  agreement  rather  than 
resort  to  compulsion.  They  rely  upon  free  initiative  not  only 
in  getting  things  produced  but  in  determining  the  shares  in 
distribution.  Further,  the  authoritarians  may  be  subdivided 
into  two  classes :  first,  those  who  believe  in  a  benevolent  des- 
potism, such  as  that  which  produced  most  admirable  results 
in  the  Canal  Zone  during  the  building  of  the  Panama  Canal 
or  that  which  prevailed  before  the  war  in  the  German  Empire  ; 
and,  second,  those  who  believe  in  the  authority  of  the  mass 
over  the  individual,  where  the  will  of  the  mass  is  indicated  by 
majority  votes  and  by  the  election  of  popular  individuals  as 
directors  and  administrators.  The  liberalists  are  likewise 
divided  into  two  groups :  first,  those  who  believe  that  there  is 
a  logical  dividing  line  between  the  sphere  of  government  action, . 
which  must  always  be  compulsory,  and  the  sphere  of  private 
enterprise,  which  must  always  be  voluntary  and  on  a  free  con- 
tractual basis ;  second,  the  extreme  anarchists  who  do  not  be- 
lieve in  force  or  compulsion  of  any  kind,  not  even  the  exercise 
of  police  power,  much  less  of  military  power. 

The  real  conflict  between  authoritarians  and  liberalists  is 
between  the  two  intermediate  groups ;  namely,  those  who  be- 
lieve in  the  compulsion  of  a  democratic  mass  over  the  individual 
and  those  who  believe  in  a  fairly  definite  dividing  line  between 
the  sphere  of  compulsion  and  the  sphere  of  freedom — in  other 
words,  it  is  the  conflict  between  socialism  and  liberalism  as  we 
find  it  in  the  world  today. 

The  one  thing  that  unites  all  who  can  properly  be  called 
socialists  is  their  opposition  to  the  private  ownership  of  the 
means  of  production,  such  as  land,  factories,  shops,  stores,  etc. 
There  are  almost  as  many  working  programs  for  abolishing 
private  property  in  these  things  as  there  are  socialists.  These 


SOCIALISM  711 

working  programs,  however,  fall  into  two  main  classes, — the 
political  and  the  militant.  By  political  programs  are  meant  all 
those  under  which  the  voting  power  of  the  masses,  if  they  can 
ever  be  persuaded  to  become  socialists  in  office,  is  to  be  used 
for  carrying  elections,  putting  socialists  in  office,  enacting  legis- 
lation, and  changing  constitutions  so  as  to  take  away  from 
private  individuals  the  productive  property  which  they  now 
possess  and  put  it  all  into  the  hands  of  the  public.  The  public 
in  question  may  be  the  large  group  called  the  state,  in  which 
case  the  system  is  called  state  socialism ;  or  it  may  be  a  smaller 
group,  such  as  a  guild,  a  trade  union,  a  syndic  ;  or  even,  in  some 
cases,  a  small  territorial  group  such  as  a  township,  in  which  case 
various  names  are  applied  such  as  guild  socialism,  syndicalism, 
or  the  soviet.  Even  in  these  cases,  however,  the  larger  group, 
called  the  state,  must  use  its  power  to  dispossess  the  private 
owners  and  permit  the  small  groups  to  take  possession. 

By  the  militant  programs  are  meant  all  those  that  proceed 
not  to  gain  control  of  the  existing  government  by  voting  but  to 
defy  it  or  overthrow  it  by  force.  In  both  cases  force  is  to  be 
used  to  dispossess  private  owners — in  one  case  it  is  the  force 
of  the  state,  operating  by  regular,  orderly,  and  constitutional 
methods ;  in  the  other  case  it  is  the  force  of  the  mob,  operating 
in  irregular,  disorderly,  and  unconstitutional  methods.  The 
ultimate  effects  are  practically  the  same,  the  difference  being 
in  the  methods  by  which  they  are  attained. 

Before  the  World  War  the  kind  of  socialism  most  talked 
about  was  state  socialism,  or  socialism  carried  out  by  a  large 
group  called  a  state.  The  war  made  that  type  of  socialism, 
temporarily  at  least,  unpopular,  and  it  is  not  much  talked  about 
now.  In  its  stead  socialism  under  a  small  group,  in  some  of  its 
various  phases,  is  now  attracting  attention,  particularly  in 
England  and  Russia.  Germany  (where,  before  the  war,  the 
advocates  of  state  socialism  were  strongest,  forming  the  leading 
political  party)  is  now  in  the  hands  of  the  Social  Democratic 
party,  but  this  party  has  given  up  even  state  socialism  and  has 
adopted  definitely  a  program  of  private  capital,  as  all  parties 


712  PRINCIPLES  OF  NATIONAL  ECONOMY 

in  all  countries  will  when  they  are  recalled  to  their  senses  by 
hard  experience. 

Even  in  Russia,  where  the  extreme  wing  of  the  socialist  party 
gained  control  and  where  the  so-called  social  revolution  was 
ushered  in  with  much  noise  and  violence,  the  experience  of  the 
Bolsheviki  is  sobering  them  down.  It  was  apparent  from  the 
very  beginning  that  there  were  only  two  possible  outcomes. 
One  was  to  starve  so  many  people  to  death  or  otherwise  so 
reduce  the  population  that  Russia  could,  with  her  rich  resources 
but  inefficient  social  organization,  manage  to  feed  and  clothe 
her  remaining  population.  The  other  was  that  the  new  govern- 
ment would  come  back  to  the  essentials  of  capitalism ;  that  is, 
the  recognition  of  private  property  in  whatever  one  has  pro- 
duced or  bought  from  the  producer  on  a  free  and  open  market. 
Wherever  this  principle  is  recognized,  there  is  capitalism  be- 
cause men  will  make  tools  and  also  buy  and  sell  them.  Who- 
ever makes  a  tool  or  buys  one  is,  to  the  extent  of  owning  that 
tool,  a  capitalist.  Whether  the  tool  is  small  and  cheap  or  large 
and  expensive  does  not  affect  the  principle.  Without  a  frank 
recognition  of  this  principle  no  large  population  ever  was  or 
ever  can  be  abundantly  fed  and  clothed.  Already  (1921)  the 
essentials  of  capitalism  are  being  recognized  by  the  soviet  gov- 
ernment of  Russia,  though  with  infinite  effrontery  its  leaders 
still  claim  to  be  leaders  of  a  revolution  instead  of  acknowledg- 
ing that  they  are  making  themselves  leaders  of  the  inevitable 
counterrevolution. 


CHAPTER  LII 
COMMUNISM 


f  Autocratic  -»-  Kaiserism 


PROGRAMS 
OF  RECON- 
STRUCTION 


Authoritarian  « 


Democratic 


Under   a   large   group — state 


socialism 


C  Syndicalism 


Under  a  small  I  Guild  socialism 
group  1  Soviet  government 


I  Sovie 
[l.W. 


W.  plans 


f  .  .    (  Carlyle's  benevolent  despotism 

I  Autocratic  *!  „,,      _,       .  „ 

L  The  Canal  Zone  etc. 

Liberal  «  r  Philosophical  anarchism 

[  Democratic  J.  The  laissez-faire  economist's  program 
[  The  balancing-up  program 

Compulsion  versus  freedom.  It  was  pointed  out  in  the  chap- 
ter on  Labor  Programs  that  the  schemes  for  the  improvement 
of  the  laboring  classes  fall  under  two  general  heads.  In  this 
chapter  we  shall  discuss  some  of  the  more  far-reaching  plans 
of  social  reconstruction,  as  outlined  above.  The  autocratic  form 
of  authoritarianism  (namely,  Kaiserism)  is,  fortunately,  dead. 
Among  those  which  rely  upon  the  authority  of  the  mass  or 
group  over  the  individual,  communism  is  the  most  extreme. 
It  is  sometimes  called  cooperation,  but  it  is  compulsory  coopera- 
tion as  distinguished  from  voluntary  cooperation.  The  com- 
pulsion is  made  complete  by  the  fact  that  the  community,  or 
the  group,  owns  all  the  property  and  the  individual  owns  none. 
All  the  processes  of  production  and  distribution  are  carried 
on  by  the  community  as  a  whole  rather  than  by  individual 
initiative  and  voluntary  agreements  among  individuals. 

Meaning  of  communism.  Communism  may  therefore  be  de- 
fined as  a  type  of  social  organization  in  which  all  wealth,  in- 
cluding both  producers'  goods  and  consumers'  goods,  is  owned 
and  controlled  by  the  community.  It  differs  from  socialism  in 

713 


714  PRINCIPLES  OF  NATIONAL  ECONOMY 

that  the  latter  proposes  that  the  community  shall  own  and 
operate  only  producers'  goods,  leaving  the  consumers'  goods  to 
be  owned  and  enjoyed  by  individuals.  A  completely  com- 
munistic society,  for  example,  would  own  the  dwelling  houses 
and  even  the  food  and  clothing,  but  would  distribute  these  to 
the  individual  members  very  much  as  they  are  now  distributed 
within  the  small  group  which  we  call  the  family.  From  a  cer- 
tain point  of  view  we  might  say  that  the  ideal  family  of  today  is 
a  small  communistic  group  in  which  all  property  is  held  in  com- 
mon and  enjoyed  in  common  rather  than  separately  by  the 
individual  members  of  the  family. 

Relation  to  anarchism.  Theoretically,  communism  would  be 
at  the  opposite  end  of  the  scale  from  anarchism,  which  is  an 
absence  of  all  government, — at  least  the  absence  of  all  com- 
pulsory government.  In  actual  discussions,  however,  it  is  not 
always  easy  to  distinguish  between  a  communist  and  an  an- 
archist. As  a  matter  of  fact,  there  is  a  considerable  group  of 
individuals  who  call  themselves  communist-anarchists ;  that  is, 
they  are  opposed  to  any  kind  of  government  which  resembles 
those  with  which  we  are  now  acquainted.  They  would  sub- 
stitute small  communistic  groups,  each  one  working  more  or 
less  independently  of  the  others,  and  make  such  voluntary 
arrangements  for  exchange  of  products  as  they  might  find  to 
their  mutual  advantage.  In  so  far  as  they  would  oppose  all 
compulsion,  they  would  be  called  anarchists ;  in  so  far  as  they 
would  have  all  wealth  owned  in  common,  at  least  within  small 
groups,  they  would  be  called  communists.  Unless,  however, 
the  small  group  could  exercise  some  compulsory  control  over 
the  property  of  the  group,  it  would  be  anarchism  rather  than 
communism.  If  the  group  did  exercise  orderly  control  over 
its  own  property  to  the  exclusion  of  individuals  and  of  rival 
groups,  it  would  be  compelled  to  exercise  compulsion  and  would 
therefore,  to  that  extent,  cease  to  be  anarchistic  and  become 
purely  communistic. 

Utopias.  Naturally  enough,  communism  has  never  been 
tried  on  a  large  scale.  It  has  been  advocated  by  many 


COMMUNISM  715 

philosophers,  both  ancient  and  modern.  Many  pictures  have 
been  drawn  of  ideal  societies  in  which  communism  was  the 
outstanding  feature.  Plato,  in  his  "Republic,"  pictured  such 
an  ideal  commonwealth ;  not  only  was  all  wealth  to  be  held 
in  common,  but  wives  and  children  likewise.  Defective  chil- 
dren, or  children  who  seemed  likely  to  be  a  burden  rather 
than  a  help  to  the  state,  were  to  be  disposed  of  in  early 
infancy.  Sir  Thomas  More,  in  his  "Utopia,"  presented  another 
picture  of  an  ideal  society  based  upon  communism.  In  order 
to  give  an  impression  of  reality  he  pictured  some  travelers  in 
South  America  who  had  discovered  a  new  country,  in  which 
communism  prevailed.  Francis  Bacon  gave  us  a  somewhat 
fragmentary  picture  of  his  ideal  of  society  in  his  "New  At- 
lantis." Tommaso  Campanella,  in  "The  City  of  the  Sun," 
and  various  other  writers  have  kept  alive  the  ideal  of  a  com- 
munistic society.  In  more  recent  times  we  have  such  books  as 
"News  from  Nowhere,"  by  William  Morris,  "The  Coopera- 
tive Commonwealth  in  its  Outlines,"  by  Laurence  Gronlund, 
and  "Looking  Backward,"  by  Edward  Bellamy.  This  is  a 
list  of  distinguished  writers,  and  their  books  make  attractive 
reading.  They  show  pretty  clearly  how  persistently  the  world 
has  dreamed  of  social  conditions  in  which  there  should  be  no 
rivalry  of  interests,  no  quarreling  and  bickerings  over  questions 
of  property, — of  mine  and  thine. 

It  is  not  very  difficult  to  show  where  these  pictures  are  de- 
fective and  how  impractical  such  schemes  of  social  organization 
are.  The  world  at  large,  or  at  least  a  great  majority  of  the 
people  of  the  world,  has  put  very  little  confidence  in  these 
proposals,  but  probably  no  generation  has  been  without  a  cer- 
tain number  of  spirits  who  have  retained  their  belief  in  those 
peculiar  ideals  of  justice  and  economy  which  these  Utopian 
works  have  set  forth. 

Experiments.  The  primitive  Christians.  Nor  have  actual 
experiments  been  wanting.  The  primitive  Christian  Church  is 
frequently  referred  to  as  an  example  of  communism.  One  or 
two  passages  in  the  Acts  of  the  Apostles  indicate  that  the  first 


7i 6  PRINCIPLES  OF  NATIONAL  ECONOMY 

Christians,  at  least,  maintained  a  communistic  fund  for  the 
maintenance  of  impecunious  members.  For  a  short  time  they 
appear  to  have  put  practically  all  their  possessions  into  a  com- 
mon fund.  But  in  addition  to  this  they  stopped  working  and 
remained  together  in  one  place,  awaiting  the  second  coming  of 
the  Lord.  This  makes  it  appear  as  though  communism  had 
not  been  with  them  an  ideal  scheme  of  social  organization  but 
merely  a  convenient  arrangement  by  means  of  which  they  could 
live  while  preparing  for  the  end  of  the  world  and  their  sudden 
translation  to  heaven. 

The  Spartans.  The  Spartan  commonwealth  is  likewise  re- 
ferred to  frequently  as  a  communistic  society.  According  to 
the  account  given  in  Plutarch's  "Life  of  Lycurgus,"  there  were 
many  communistic  features  about  the  life  of  the  Spartans.  It 
appears  to  have  been  the  communism  of  a  military  camp,  how- 
ever, for  the  Spartans  themselves  were  only  a  small  clan,  or 
caste,  ruling  over  a  much  larger  population  of  subject  people. 
In  order  that  they  might  be  strong  in  a  military  sense  and  hold 
the  masses  of  the  people  in  subjection  they  organized  them- 
selves very  much  as  a  military  camp  has  always  been  organized. 
There  was  no  communism  whatever  for  the  mass  of  the  people. 
It  extended  only  to  the  small  aristocratic  and  ruling  class 
called  Spartans. 

The  monasteries.  Most  of  the  monasteries  of  the  Middle 
Ages  were  organized  on  a  communistic  basis.  They  also  prac- 
ticed celibacy,  showing  that  they  did  not  regard  communism 
as  the  ideal  basis  of  a  continuing  human  society.  The  whole 
monastic  life  was  organized  for  the  purpose  of  promoting  spirit- 
uality rather  than  for  the  purpose  of  reforming  human  society. 

The  Taborites.  Certain  extreme  sects  among  the  early  Prot- 
estants attempted  some  kind  of  communistic  life  without  celi- 
bacy, but  never  made  much  of  a  success.  Conspicuous  among 
these  were  the  Taborites,  an  extreme  faction  of  the  followers 
of  John  Huss,  the  Bohemian  reformer.  They  withdrew  from 
the  city  of  Prague  and  started  a  community  on  a  hill  to  which 
they  gave  the  name  Mount  Tabor.  They  hence  became  known 


COMMUNISM  717 

as  the  Taborites.  So  long  as  they  were  thoroughly  united  by 
their  religious  sentiments  they  worked  very  successfully,  not 
only  in  productive  industry  but  even  in  war,  for  the  great  Aus- 
trian Empire  sent  army  after  army  against  them.  They  de- 
feated the  imperial  armies  because  of  the  superiority  of  their 
organization.  But  eventually  dissensions  arose  among  them ; 
they  were  divided  and  overthrown,  and  their  community  was 
broken  up. 

American  experiments.  America  has  been  a  fruitful  field  for 
the  trying-out  of  all  sorts  of  experiments.  Many  of  the  first 
colonists  came  here  because  they  were  inspired  by  religious 
sentiments.  They  founded  colonies  where  their  religious  ideas 
could  flourish.  This  continent  presented  a  virgin  field  where 
people  with  peculiar  ideals  of  religious  organization  or  of  social 
economy  could  come  and  put  their  ideals  to  the  test. 

The  outline  on  the  following  page  gives  a  rough  classification 
of  the  more  important  of  these  experiments.  There  were  many 
not  included  in  this  list,  which  were  either  unimportant  as  to 
numbers  or  so  short-lived  as  to  make  them  unworthy  of  men- 
tion. It  will  be  noticed  that  the  long-lived  communities  were 
all  religious  in  their  nature.  Of  the  nonreligious  communities 
only  one  (namely,  the  Icarians)  lasted  a  single  generation, 
whereas  several  of  the  religious  communities  have  lasted  half  a 
century,  and  one  group  of  communities  (namely,  the  Shakers) 
had  several  colonies  that  survived  for  more  than  a  century. 

Religious  communities.  Most  of  the  religious  communities, 
it  will  be  noticed,  are  of  foreign  origin,  and  most  of  these  are 
of  German  origin.  The  Shakers  are  placed  among  those  of 
American  origin.  As  a  religious  sect  the  Shakers  originated 
in  England,  but  they  made  their  experiments  in  communism  in 
this  country.  They  have  established  numerous  colonies  from 
Maine  to  Kentucky.  They  are  celibates  and  therefore  could 
have  no  continuing  existence  unless  they  continued  to  make 
converts.  This  they  have  failed  to  do  in  recent  years,  and 
consequently  the  Shaker  communities  are  dying  out  as  the  old 
people  drop  away. 


AMERICAN  1 
COMMUNISTIC  < 
SOCIETY 


Non- 
religious 


Of  foreign 
origin 


Owenistic 


Fourieristic 


Chicago, 


outline 
1908. 


The   Shakers    (numerous    colonies) 

Maine  to  Kentucky,  1787- 
The  Perfectionists  of  Oneida,  N.Y., 

1848-1879 

Zion  City,  111.,  1890-1896 
Jemima  Wilkinson's  New  Jerusalem, 

N.Y.,  1786-1820 
Celesta,  Pa.,  1852-1864 
,  Of  American]  Salem-on-Erie,  N.Y.,  1876 

origin  ]  The  Woman's  Commonwealth,  Texas 

and  Washington,  D.C.,  1880- 
The  Lord's  Farm,  N.J.,  1877 
Shalam,    or   the    Children's    Land, 

N.  Mex.,  1884-1901 
Estero,  Fla.,  1904 

The  Christian  Commonwealth,  Ga., 
Religious    •{  '896 

The  House  of  David,  Mich.  (?) 

Ephrata,  Pa.,  1732- 

The  Harmonists,  Pa.,  1803- 

The  Separatists  of  Zoar,  Ohio,  1819- 

1898 

The  Amana  Society,  Iowa,  1843- 
The  Bishop  Hill  Colony,  111.,  1846- 

1862 
The    Bruederhof   Communities, 

S.  Dak.,  1862 
The  Waldensian  Colonies,  N.C.  and 

Texas,  1893- 

„  St.  Nazianz  Colony,  Wis.,  1854 
fNew  Harmony,  Ind.,  1825-1827 
<  Yellow  Springs,  Ohio,  1824 
[  Numerous  others 
'Brook  Farm,  Mass.,  1841-1847 
Fruitlands,  Mass.,  1843 
Hopedale,  Mass.,  1841-1858 
North  American  Phalanx,  N.J.,  1843- 

1856 

Wisconsin  Phalanx,  Wis.,  1844-1850 
Northampton     Association,     Mass., 

1842-1846 
Numerous  others 
fNauvoo.  111.,  1849-1866 
The  IcariansJ  Cheltenham,  Mo.,  1858-1864 
[icaria,  Iowa,  1860-1895 
Skaneateles  Community,  N.Y.,  1844- 

1846 
Polish  Colony,  Anaheim,  Calif.,  1876- 

1878 

Topolobampo,  Mexico,  1886-1901 
Independent  J  The     Ruskin    Commonwealth,    Ga., 

1896-1901 
The   Cooperative   Brotherhood, 

Wash.,  1898- 

Equality  Colony,  Wash.,  1899- 
The  Straight  Edgers,  N.Y.,  1899- 
The  Helicon  Home,  1906-1907- 

is   based    on    "American    Communities,"    by    W.    A.    Hinds. 

7i8 


COMMUNISM  719 

The  Perfectionists  originated  in  Vermont  under  the  leader- 
ship of  Mr.  John  Humphrey  Noyes.  They  afterwards  moved 
to  Oneida,  New  York.  They  have  given  up  communism  and 
have  organized  themselves  in  the  form  of  a  joint-stock  society 
and  are  still  prosperous  and  doing  a  thriving  business. 

A  multitude  of  other  experiments  of  a  more  or  less  religious 
nature  have  been  carried  out  by  faith  healers,  Adventists,  and 
other  people  of  rather  extreme  religious  views. 

Of  the  religious  communities  of  foreign  origin,  that  at 
Ephrata,  Pennsylvania,  was  the  first  to  be  organized  on  a 
durable  basis  in  this  country.  Like  the  Shakers,  they  were 
celibates  and  were  therefore  doomed  to  ultimate  extinction. 

One  of  the  most  successful  of  all  these  experiments  was 
started  in  western  Pennsylvania  by  some  German  pietists 
among  the  followers  of  one  Georg  Rapp,  from  whom  they  were 
given  the  name  of  Rappists.  They  afterwards  moved  to  In- 
diana, where  they  sojourned  for  a  time  at  New  Harmony, 
in  the  southwestern  corner  of  the  state.  After  a  few  years 
they  sold  out  and  moved  back  to  Pennsylvania.  Their  colony, 
known  as  Economy,  was  a  place  for  sightseers  for  many  years. 

The  Separatists  of  Zoar  and  the  Amana  Society  were  some- 
what similar  in  their  origin  and  in  their  subsequent  history. 
They  did  not  practice  celibacy.  They  prospered  amazingly 
and  presented  a  very  attractive  life  as  seen  by  visitors  from  the 
outside.  They  were  animated  by  intense  religious  enthusiasm 
and  devotion  to  their  own  leaders.  The  Separatists  of  Zoar, 
however,  gave  up  communism  in  1898,  largely  because  the 
younger  generation  had  lost  something  of  the  religious  zeal  of 
the  older  generations  and  decided  that  they  preferred  the  in- 
dividualistic type  of  life  to  the  communistic.  The  Amana  So- 
ciety is  still  flourishing,  and  the  people  are  apparently  satisfied. 

The  Bishop  Hill  Colony  in  Illinois  was  a  Swedish  colony. 
In  character  and  organization  it  resembled  most  of  the  others. 
When  its  members  lost  their  intense  religious  zeal  they  likewise 
lost  their  enthusiasm  for  the  communistic  type  of  life  and 
gave  it  up. 


720  PRINCIPLES  OF  NATIONAL  ECONOMY 

A  series  of  communistic  societies  is  still  flourishing  in  South 
Dakota.  They  are  known  as  the  Brotherhood  Societies. 

Several  communities  of  North  Italian  Protestants  have  flour- 
ished in  the  South,  particularly  in  Valdese,  North  Carolina,  and 
near  Gainesville,  Texas. 

Nonreligious  communities.  In  1822  Robert  Owen,  a  great 
English  philanthropist  and  a  firm  believer  in  what  was  then 
called  socialism,  came  to  America  for  the  purpose  of  establish- 
ing an  ideal  community.  He  delivered  many  addresses  and 
created  much  enthusiasm.  In  looking  about  for  a  location  he 
found  that  the  Harmonists,  who  were  then  living  in  New  Har- 
mony, Indiana,  were  desirous  of  selling  out  and  moving  back 
to  Pennsylvania.  He  bought  all  their  real  estate  and  pro- 
ceeded to  establish  a  colony  of  his  own.  He  was  a  man  of  great 
ability,  who  had  made  a  fortune  of  his  own,  which  he  devoted 
liberally  to  the  propagation  of  his  ideas.  His  colony,  however, 
was  made  up  of  idealists  who  were  more  in  the  habit  of  talking 
about  their  theories  of  society  than  of  working  to  produce 
wealth ;  it  was  a  good  illustration  of  the  inability  of  any  com- 
munity to  live  on  talk.  It  lasted  a  little  over  two  years.  Nu- 
merous other  experiments  of  the  same  kind  were  tried,  none 
of  which  lasted  for  a  single  year.  One  at  Yellow  Springs,  Ohio, 
lasted  for  several  months. 

About  1841  the  works  of  a  French  communist,  Fourier,  were 
translated  and  published  in  this  country.  They  created  great 
enthusiasm,  and  a  large  number  of  experiments  were  made. 
The  most  notable  of  these  was  Brook  Farm,  Massachusetts, 
which  was  started  independently  but  afterward  adopted  the 
plan  of  Fourier.  This  experiment  was  notable  mainly  because 
of  the  great  names  in  its  list  of  members.  Some  of  the  most 
distinguished  men  and  women  of  that  day,  in  letters  and  in 
scholarship,  joined  the  Brook  Farm  community.  The  most 
successful  of  the  Fourier  experiments,  however,  was  the  North 
American  Phalanx  in  New  Jersey.  It  lasted  for  thirteen  years. 
An  experiment  at  Hopedale,  Massachusetts,  was  only  partially 


COMMUNISM  721 

communistic;  it  lasted  seventeen  years  and  then  became  a 
joint-stock  association. 

As  indicated  above,  the  most  successful  of  all  the  nonreligious 
communities  in  this  country  was  the  Icarian  community  in  Iowa. 
Its  members  were  followers  of  Etienne  Cabet,  a  French  com- 
munist, who  wrote  a  very  attractive  book  entitled  "A  Voyage 
in  Icaria."  It  awoke  the  slumbering  idealism  of  many  French 
people  who  desired  to  form  a  commonwealth  after  the  descrip- 
tion of  the  life  of  the  Icarians.  Cabet  led  his  followers  to  this 
country  and  landed  in  New  Orleans,  hoping  to  establish  them 
in  northeastern  Texas.  The  land  proved  to  be  inaccessible  and 
the  climate  not  very  agreeable.  They  returned  to  New  Orleans 
discouraged,  but  learned  that  the  Mormons  had  recently  been 
driven  out  of  Nauvoo,  Illinois.  They  proceeded  by  boat  to 
Nauvoo  and  established  themselves,  finding  plenty  of  vacant 
houses  and  factory  buildings.  Here  they  prospered  for  a  num- 
ber of  years,  but  they  wished  to  find  a  situation  where  they 
could  be  more  to  themselves,  and  a  tract  of  land  was  bought  in 
southwestern  Iowa,  not  very  far  from  the  present  town  of 
Corning.  There  they  lived  under  the  communistic  system  until 
1895,  when  they  gave  up  communism  and  came  over  to  an 
individualistic  regime. 

A  large  number  of  other  societies  have  been  established 
by  the  followers  both  of  Robert  Owen  and  of  Fourier  and, 
in  recent  years,  by  the  admirers  of  Laurence  Gronlund  and 
Edward  Bellamy. 

Results.  It  may  seem  as  though  the  experiences  of  these 
numerous  communistic  societies  tended  to  throw  discredit  upon 
all  communistic  ideals.  The  advocates  of  communism,  however, 
insist  that  the  principles  of  communism  are  still  sound,  even 
though  a  thousand  communities  have  failed.  To  an  impartial 
observer  it  looks  as  though  communism  might  work  very  well 
if  people  were  built  on  a  communistic  plan.  If  they  have  a 
passion  for  communism,  or  a  powerful  religious  emotion  which 
will  overcome  their  individualistic  and  particularistic  tend- 


722  PRINCIPLES  OF  NATIONAL  ECONOMY 

encies,  they  may  live  together  peaceably  under  communism. 
Unless  they  are  inspired  with  religious  zeal  or  a  genuine  pas- 
sion for  communism,  it  seems  as  though  the  natural  individ- 
uality, not  to  say  the  contrariness,  of  human  nature  would 
continue  to  break  up  all  communistic  societies  in  the  future 
as  it  has  in  the  past. 

But  why,  it  may  be  asked,  will  not  communism  work  in  a 
large  national  group  as  it  now  works  in  a  small  family  group  ? 
It  does  not  seem  to  work  particularly  well  in  some  families.  In 
those  few  abnormal  cases  where  the  members  of  the  family 
have  no  particular  affection  for  one  another,  the  question  of 
the  division  of  the  family  funds  is  a  difficult  one.  If  the  father 
is  selfish  and  cares  nothing  for  the  others  he  becomes  an  auto- 
crat and  spends  all  or  the  greater  part  of  his  income  upon  him- 
self. If  the  others  feel  the  same  way  toward  him  and  one 
another  they  quarrel  among  themselves.  But  in  a  normal  case, 
where  an  intense  affection  for  one  another  prevails,  there  is 
no  quarreling  and  everything  is  shared  in  common. 

If  it  were  possible  for  the  members  of  a  large  national  group 
to  feel  toward  one  another  as  do  the  members  of  a  normal 
family,  communism  or  almost  any  other  system  might  work 
well.  But  the  average  man's  capacity  for  affection  is  limited. 
It  would  take  one  with  a  genius  for  friendship  to  feel  a  warm 
affection  for  even  a  hundred  separate  individuals,  to  say  noth- 
ing of  a  hundred  million.  It  would  be  practically  impossible 
for  any  of  us  to  feel  toward  each  and  every  one  of  a  hundred 
million  people,  only  a  few  of  whom  we  had  ever  seen,  precisely 
as  we  do  toward  our  own  brothers  and  sisters,  fathers  and 
mothers,  and  other  very  near  relatives.  This  is  sufficient  reason 
why  communism  cannot  be  made  to  work  well. 


CHAPTER  LIII 
ANARCHISM 

In  some  respects  anarchism  is  the  diametric  opposite  of 
communism  and  almost  the  diametric  opposite  of  socialism ;  in 
other  respects  it  is  somewhat  similar  to  both.  Anarchism  and 
socialism  represent  opposite  tendencies  in  that  the  socialist  pro- 
poses to  enlarge  the  power  and  function  either  of  the  state  or  of 
some  kind  of  public  organization,  whereas  the  anarchist  pro- 
poses to  eliminate  all  authority,  or  all  control  of  one  person  by 
another.  Such  organization  as  shall  exist  under  anarchism 
shall  be  purely  voluntary.  Voluntary  groups  may  be  formed 
as  large  or  as  small  as  the  individual  members  care  to  have 
them.  The  relations  of  one  group  to  another  shall  likewise  be 
on  a  purely  voluntary  or  contractual  basis.  There  shall  be  no 
state  with  a  military  arm  or  with  police  power  of  any  kind. 

Anarchism  and  socialism  resemble  each  other  in  that  both 
revolt,  either  in  part  or  in  whole,  against  any  system  which 
gives  one  man  power  or  authority  over  another.  Many  of  the 
advocates  of  socialism  object  to  private  capital  primarily  on  the 
ground  that  it  gives  one  man  (namely,  the  capitalist  employer) 
power  and  authority  over  another  man,  the  propertyless  laborer. 
The  anarchist  says,  regarding  this  opinion :  "It  is  good  so  far 
as  it  goes.  We  anarchists  are  likewise  opposed  to  giving  one 
man  power  or  authority  over  another.  The  private  ownership 
of  capital  does  what  the  socialist  says  it  does,  and  that  is  wrong. 
We  are  therefore  opposed  to  the  private  ownership  of  capital. 
But  capital  is  not  the  only  source  of  authority.  The  government 
likewise  gives  one  man  power  or  authority  over  another ;  the 
capitalist  employer  does  not  in  fact  have  as  much  power  or 
authority  as  a  judge  or  a  policeman,  a  governor  or  a  president. 
The  socialist,  therefore.,  is  only  a  halfway  anarchist.  He  is 

7-3 


724  PRINCIPLES  OF  NATIONAL  ECONOMY 

opposed  to  one  source  of  power  and  authority ;  we  are  opposed 
to  both  sources." 

May  government  eventually  become  unnecessary?  The  un- 
derlying philosophy  of  anarchism  is  of  various  kinds.  There  is 
one  system  of  thought  which  is  frequently  but  improperly 
called  anarchistic.  It  is  held  by  certain  people  that  government 
and  compulsion  are  made  necessary  by  the  imperfections  in 
human  nature, — that  if  we  were  so  highly  developed  morally 
that  each  individual  would  voluntarily  do  what  he  ought  to  do 
or  what  was  in  the  public  interest,  then  it  would  not  be  neces- 
sary to  use  authority  or  compulsion  on  anybody  ;  but  that  since 
there  are  individuals  with  undeveloped  moral  natures, — indi- 
viduals who  do  not  voluntarily  and  automatically  respond  to 
the  needs  of  society, — it  is  therefore  necessary  that  they  be 
compelled  to  do  what  they  ought  to  do,  or  (which  is  the  same 
thing)  what  they  would  do  if  they  were  fully  developed. 

In  the  closing  paragraphs  of  his  monumental  work  on  sociol- 
ogy, which  was  in  turn  the  culmination  of  his  great  system  of 
synthetic  philosophy,  Herbert  Spencer1  sums  up  his  ideas  as  to 
the  ultimate  end  of  all  social  progress  in  the  following  eloquent 
words : 

But  if  the  process  of  evolution  which,  unceasing  throughout  past 
time,  has  brought  life  to  its  present  height,  continues  throughout  the 
future,  as  we  cannot  but  anticipate,  then,  amid  all  the  rhythmical 
changes  in  each  society,  amid  all  the  lives  and  deaths  of  nations, 
amid  all  the  supplantings  of  race  by  race,  there  will  go  on  that 
adaptation  of  human  nature  to  the  social  state  which  began  when 
savages  first  gathered  together  into  hordes  for  mutual  defence — an 
adaptation  finally  complete.  .  .  . 

On  the  one  hand,  by  continual  repression  of  aggressive  instincts 
and  exercise  of  feelings  which  prompt  ministration  to  public  welfare, 
and  on  the  other  hand  by  the  lapse  of  restraints,  gradually  becoming 
less  necessary,  there  must  be  produced  a  kind  of  man  so  consti- 
tuted that  while  fulfilling  his  own  desires  he  fulfils  also  the  social 
needs.  .  .  . 

TThe  Principles  of  Sociology  (second  edition),  Vol.  Ill,  pp.  598-601- 
London,  1897. 


ANARCHISM  725 

Long  studies  .  .  .  have  not  caused  me  to  recede  from  the  belief 
expressed  nearly  fifty  years  ago  that — "the  ultimate  man  will  be 
one  whose  private  requirements  coincide  with  the  public  ones.  He 
will  be  that  manner  of  man  who,  in  spontaneously  fulfilling  his  own 
nature,  incidentally  performs  the  functions  of  a  social  unit ;  and  yet 
is  only  enabled  so  to  fulfil  his  own  nature  by  all  the  others  doing 
the  like." 

Whether  this  delectable  state  is  to  be  reached  by  the  slow  and 
somewhat  cruel  process  of  evolution,  as  Spencer  believes,  or 
by  the  process  of  moral  reform  and  religious  evangelism,  may 
be  open  to  speculation.  There  are  probably  not  many  people 
who  disagree  with  the  general  conclusion  that  government 
would  be  unnecessary  in  either  case.  If  (but  this  is  a  large 
"if")  human  nature  could  be  so  perfected,  either  by  the  slow 
elimination  of  the  unsocial  and  the  antisocial  (that  is,  the  crim- 
inal and  the  immoral)  or  by  their  moral  regeneration,  it  might 
very  easily  follow  that  government  would  ultimately  become 
unnecessary,  or  at  least  that  compulsion  by  governmental 
authority  would  become  a  thing  of  the  past.  This  position,  how- 
ever, can  hardly  be  called  anarchistic  in  any  real  sense,  for  the 
real  anarchist  believes  not  that  government  may  ultimately 
become  unnecessary  but  that  it  is  now  unnecessary. 

Impatience  of  restraint.  There  is  another  type  of  thought, 
sometimes  characterized  as  anarchistic,  which  does  not  revolt 
so  much  against  government  and  the  use  of  compulsion  in  the 
form  of  police  power  as  against  what  is  called  moral  compul- 
sion ;  that  is,  the  setting  up  by  society,  or  by  people  in  author- 
ity, of  standards  which  others  are  bound  to  follow.  It  is 
proposed,  therefore,  that  we  throw  off  the  so-called  shackles  of 
conventionality  and  even  of  morality,  and  that  everyone  do 
that  which  is  right  in  his  own  eyes,  regardless  of  what  may  be 
said  by  other  people  or  by  institutions  and  organizations  which 
pretend  to  tell  us  what  we  ought  to  do. 

Is  morality  an  invention  of  weaklings  to  curb  the  strong  ? 
Among  the  people  who  take  this  point  of  view,  however,  two 
diametrically  opposite  conclusions  are  reached.  There  is  one 


726  PRINCIPLES  OF  NATIONAL  ECONOMY 

school  represented  by  such  writers  as  Kaspar  Schmidt  and 
Friedrich  Nietzsche,  who  hold  that  religion  and  morality  are 
the  inventions  of  the  weaklings  of  the  world  for  the  purpose  of 
holding  the  strong  in  check.  There  is  an  old  fable  regarding 
the  mice  who  found  themselves  oppressed  by  the  cat.  They 
voted  unanimously  that  the  cat  should  wear  a  bell  in  order 
that  the  mice  might  be  protected.  According  to  these  writers 
religion  and  morality  are  merely  different  ways  by  which  mice 
try  to  put  the  bell  on  the  cat.  They  try  to  make  it  unpopular 
for  the  strong  man  to  use  his  strength.  They  persuade  him  that 
it  is  immoral  or  irreligious,,  or  that  the  vengeance  of  super- 
natural agencies  will  be  let  loose  upon  him  if  he  exercises  his 
strength  to  the  detriment  of  the  masses.  Therefore  the  strong 
man,  sometimes  called  the  superman,  should  break  loose  from 
these  conventionalities,  should  snap  the  cords  with  which  the 
Lilliputians  have  bound  him,  and  should  dare  to  be  great  and 
independent,  and  impose  his  will  on  the  masses  if  he  is  able 
to  do  so. 

Is  morality  an  invention  of  those  in  power  to  curb  the  masses  ? 
The  other  school  of  anarchists,  and  certain  socialists  who  are 
anarchistic  in  spirit  if  not  in  program,,  assert  that  religion  and 
morality  are  the  cunning  inventions  of  priests,  soldiers,  and 
capitalists  for  the  purpose  of  holding  the  masses  in  check ;  that 
for  the  average  man  to  be  good  is  merely  to  be  good  for  some- 
body else — that  is,  for  those  in  power;  that  to  be  good  is  to 
support  the  priest  or  the  capitalist  or  the  policeman  or  the 
judge  or  someone  else  in  authority;  that  to  be  free  is  to  be 
good  to  oneself. 

As  to  which  of  these  two  conclusions  is  the  more  absurd,  it 
would  be  difficult  to  decide.  They  are  mentioned  to  show  to 
what  extremes  of  aberration  the  human  mind  is  capable  of 
going.  One  doctrine  would  lead  the  strong  man  to  do  as  he 
pleased,  to  impose  his  will  upon  his  neighbors  either  by  the 
weight  of  his  fist  or  by  his  superior  power  of  destruction  in 
some  other  form ;  the  other  conclusion  would  lead  the  masses  of 
the  people  to  sink  into  a  state  of  license  and  violence  which 


ANARCHISM  727 

would  destroy  civilization  and  land  us  in  a  sort  of  primeval 
social  chaos. 

Are  all  human  interests  harmonious  ?  There  is,  however,  an- 
other system  of  thought  which  is  truly  anarchistic  and  less 
repulsive  than  either  of  these.  This  system  is  based  on  the 
fundamental  assumption  that  all  human  interests  are  harmoni- 
ous. In  this  best  of  all  possible  worlds,  it  is  claimed,  there  can 
be  no  such  thing  as  a  conflict  of  human  interests ;  it  is  in  some 
way  a  reflection  upon  the  Creator  of  the  world  to  say  that  there 
could  be  anything  but  a  harmony  of  real  interests  among  men ; 
it  cannot  possibly  be  true  that  one  man's  meat  is  another  man's 
poison ;  these  apparent  conflicts  are  the  creation  of  men  and 
human  institutions  and  are  not  inherent  in  the  nature  of  man 
and  the  universe. 

This  underlying  assumption  sounds  attractive,  and  doubtless 
many  of  us  would  like  to  believe  it  if  we  could.  There  are, 
however,  so  many  hard  facts  in  the  way  that  not  many  of  us 
are  able  to  bring  ourselves  to  the  point  of  ignoring  the  very 
present  and  prevalent  conflict  of  interests.  It  was  shown  in 
the  chapter  on  Scarcity  that  the  mere  fact  of  a  congestion  of 
population — of  too  many  people's  trying  to  live  in  one  spot- 
creates  in  that  spot  a  state  of  scarcity.  Food  enough  in  that 
particular  spot  cannot  be  produced  for  as  many  people  as  would 
like  to  live  there.  This  situation  in  itself  inevitably  and  neces- 
sarily produces  a  conflict  of  interests.  Either  some  people  must 
move  to  another  spot  or  food  must  be  brought  from  other  spots 
to  feed  the  people  who  are  there.  Either  alternative  will  prove 
disagreeable  to  somebody.  If  neither  of  these  alternatives  is 
chosen,  then  there  must  be  hunger ;  more  than  one  person  will 
be  wanting  each  parcel  of  food,  and  this  in  itself  is  a  conflict 
of  interests.  Here  are  certain  facts  of  a  physical  nature  which 
cannot  by  any  effort  of  the  will  or  the  imagination  be  conjured 
out  of  existence.  There  is,  in  fact,  a  conflict  of  interests 
wherever  two  people  want  the  same  thing. 

Conflict  of  interests  makes  control  necessary.  Wherever  there 
is  a  conflict  of  interests,  one  of  two  things  is  absolutely  nee- 


728  PRINCIPLES  OF  NATIONAL  ECONOMY 

essary :  either  the  individuals  must  have  a  high  moral  develop- 
ment, which  will  lead  each  one  to  surrender  certain  interests 
in  favor  of  others,  or  there  must  be  an  umpire  to  decide 
between  them  and  enforce  his  decision.  This  umpire,  by  what- 
ever name  he  may  be  called,  exercises  the  function  of  govern- 
ment. In  fact,  this  umpire  is  government,  whether  it  be  an 
individual  or  a  great  organization  of  individuals  exercising 
various  functions,  such  as  legislation,  administration,  interpre- 
tation, enforcement,  and  so  on. 

Emotional  anarchism.  There  is  another  type  of  anarchism 
which  can  scarcely  be  said  to  have  any  underlying  philosophy. 
It  is  based  wholly  on  feeling  and  sentiment.  Doubtless  every 
human  being  possesses  some  repugnance  toward  being  ruled, — 
toward  being  compelled  to  do  that  which  he  dislikes  to  do,  or  to 
leave  undone  that  which  he  wrould  like  to  do.  A  preference 
for  one's  own  way  shows  itself  rather  early  in  the  lives  of 
children.  Doubtless  all  of  us  feel  bitter  at  times  regarding 
some  act  of  some  governing  agency  or  authority.  Generally, 
however,  we  are  able  to  keep  these  feelings  under  sufficient  con- 
trol to  enable  us  to  obey  the  law  and  support  the  government. 
In  other  words,  we  generally  see  the  necessity  of  government, 
however  disagreeable  it  is  at  times  to  be  forced  to  submit. 
Occasionally,  however,  an  individual  will  react  in  the  other 
way ;  that  is,  his  repugnance  will  overcome  his  judgment.  He 
has  no  particular  philosophy,  though  he  can  always  invent  a 
reason  or  an  excuse.  A  policeman.,  a  court,  a  flag,  or  any  other 
evidence  or  symbol  of  government  is  as  a  red  flag  in  his  face ; 
it  causes  anger,  resentment,  and  insurgency,  and  nothing  else. 
Such  people  are  sometimes  very  likable  in  other  respects.  So 
long  as  their  feelings  are  properly  soothed  they  may  be  exceed- 
ingly amiable  and  even  affectionate.  Those  who  know  them 
personally  find  it  difficult  to  reconcile  their  general  personal 
qualities  with  their  feeling  against  government.  Nevertheless, 
from  any  broad  and  philosophical  point  of  view  they  are  among 
the  most  dangerous  members  of  society.  They  are  the  un- 
adapted  in  a  very  important  social  and  psychological  sense. 


ANARCHISM  729 

Psychologically  they  are  as  unfit  for  living  under  a  settled, 
orderly  government  as  a  fish  is  physically  unfit  for  living  out 
of  water.  The  process  of  evolution  which,  according  to  Spencer, 
would  eventually  produce  the  delectable  state  of  society  de- 
scribed in  the  above  extract  is  steadily  weeding  such  people  out. 
They  insist  on  bumping  their  heads  against  the  walls  of  the 
universe  and  destroying  themselves  along  with  the  criminals 
and  others  who  are  unadapted  to  a  settled  civil  life.  If  by 
the  meek  we  mean  merely  the  adaptable,  the  teachable,  and  the 
reasonable,  and  if  by  the  unmeek  we  mean  the  intractable,  the 
unteachable,  the  self-willed,  the  pig-headed,  then  it  is  probably 
a  scientific  proposition  to  say  that  the  meek  "shall  inherit  the 
earth";  that  is,  survive,  while  the  unmeek  shall  be  exterminated 
by  the  slow  but  sure  process  of  evolution.  This  will  be  the 
ultimate  cure  for  this  type  of  anarchism. 

There  is  still  another  type  of  anarchist  who  is  merely  mean 
and  bent  on  making  trouble.  He  can  always  be  relied  upon  to 
be  on  the  wrong  side  of  every  question.  Wherever  decent,  self- 
respecting  men  and  women  are  in  general  agreement  on  any 
subject,  he  will  always  be  found  opposing  them.  It  is  true  he 
does  not  always  go  in  for  anarchism.  He  is  found  in  every 
movement  which  gives  him  a  chance  to  vent  his  general  hate 
and  spitefulness.  Wherever  there  is  a  chance  to  denounce  gov- 
ernment, religion,  law,  order,  morality,  chastity,  sobriety,  or 
anything  else  that  is  of  good  report,  his  voice  is  always  heard. 
He  generally  tries  to  get  into  good  company  by  calling  himself 
a  radical,  an  iconoclast,  or  a  revolutionist,  knowing  that  excel- 
lent men  and  women  have  been  called  by  all  of  these  names. 
He  is  only  another  type  of  that  numerous  class  which  cannot 
stand  even  the  moderate  degree  of  civilization  to  which  we 
have  attained,  and  would,  if  he  could,  drive  us  back  to  savagery. 

Is  patriotism  a  vice  ?  There  are  various  other  views,  some 
of  them  of  an  idealistic  nature,  which  savor  of  anarchism  and 
lead  to  absurd  conclusions  on  practical  subjects.  One  of  these 
is  that  patriotism  is  a  vice.  This  strange  doctrine  is  advanced 
on  grounds  of  the  broadest  humanitarianism.  We  should  love 


730  PRINCIPLES  OF  NATIONAL  ECONOMY 

all  men  equally,  it  is  urged,  without  regard  to  race,  color,  creed, 
or  nationality.  The  patriot  cares  more  for  his  fellow  citizens 
than  for  the  citizens  of  other  countries  ;  therefore,  according  to 
this  type  of  anarchism,  he  is  narrow  in  his  views.  Moreover,  if 
he  thinks  more  of  his  fellow  citizens  than  of  others,  this  will 
lead  him,  in  case  of  war,  to  try  to  kill  the  citizens  of  the 
enemy  country.  Killing,  it  is  argued,  is  murder.  The  fact  that 
it  is  done  as  an  act  of  war  does  not  in  the  slightest  degree 
change  its  character. 

When  a  great  world  state  exists,  then,  of  course,  it  will  be 
proper  to  be  patriotic  toward  it.  We  may  even  work  consist- 
ently for  it.  But  to  condemn  all  patriotism  for  lesser  states 
would,  if  this  condemnation  were  effective,  merely  destroy 
existing  states  and  all  law  and  order  and  plunge  the  world  in 
chaos.  Family  sentiment  is  narrow  in  the  same  sense  that 
national  sentiment  is  narrow.  The  man  who  loves  his  wife 
must  care  more  for  her  than  for  other  women.  This  and  all 
other  forms  of  family  sentiment  may,  in  a  sense,  make  us 
narrow,  but  it  does  not  follow  that  it  is  unwise  or  uneconomical 
to  be  narrow.  Again,  if  we  are  to  avoid  narrowness,  why  be 
humanitarians?  Are  not  many  animals  also  companionable 
and  lovable  ?  To  show  a  preference  for  men  as  against  animals 
or  even  microbes  is  to  be  narrow  in  the  sense  in  which  these 
people  have  been  using  that  word. 


CHAPTER  LIV 

THE  SINGLE  TAX 

Meaning  of  the  single  tax.  By  the  single  tax  is  meant  a 
policy  under  which  all  the  public  revenue  is  to  be  raised  by  the 
single  tax  on  land  value.  One  of  the  most  persistent  misin- 
terpretations of  the  single  tax  is  that  of  assuming  that  it  means 
a  tax  to  be  raised  on  real  estate  rather  than  on  land  values. 
Land  value  is  denned  as  the  value  of  the  land  itself  irrespective 
of  all  improvements,  such  as  ditching,,  draining,  fencing,  the 
planting  of  trees,  and  the  erection  of  buildings.  In  short,  every- 
thing done  on  the  land  itself  to  improve  the  value  of  an  estate 
is  classed  as  an  improvement  and,  under  the  single  tax,  would 
be  exempt  from  taxation.  This  leaves  nothing  except  the  loca- 
tion value  and  the  fertility  value  to  be  taxed. 

The  physiocrats,  believers  in  the  "rule  of  nature,"  believed  in 
the  impbt  unique.  The  original  advocates  of  the  single  tax  were 
a  group  of  French  economists  called  physiocrats.  It  was  their 
belief  that  land  was  the  original  and  fundamental  source  of  all 
wealth,  and  that  the  rent  of  land  was  the  only  real  surplus 
wealth  which  the  community  ever  produced.  From  their  point 
of  view,  rent  was  due  to  the  bounty  of  nature.  They  believed 
that  every  other  tax  must  eventually  be  paid  out  of  rent  any- 
way, wherever  it  may  have  been  laid  by  the  government.  If 
we  tax  the  products  of  industries,  there  is  no  surplus  out  of 
which  the  tax  can  be  paid  ;  as  a  result  we  either  raise  their  price 
or  depress  the  price  of  the  raw  materials.  If  we  tax  labor  we 
must  raise  wages  accordingly;  if  we  tax  enterprise  we  must 
raise  profits.  Every  tax,  therefore,  is  shifted  from  one  to 
another  till  it  reaches  the  landowner,  who  alone  has  a  surplus 
out  of  which  it  can  be  paid.  The  landowner  cannot  shift  it  any 
farther,  and,  since  he  must  ultimately  pay  the  tax,  the  physio- 
crats argued  that  it  was  better  for  him  to  pay  it  directly  in  the 

731 


732  PRINCIPLES  OF  NATIONAL  ECONOMY 

first  place  than  indirectly  after  several  shif tings  from  one  person 
to  another.  They  regarded  the  single  tax  as  a  good  system  of 
taxation  for  raising  revenue,  not  as  an  engine  of  social  reform. 

The  classical  economist  regarded  rent  as  a  peculiar  income. 
The  idea  that  landowners  who  live  entirely  upon  the  rent  of 
land  are  in  a  peculiar  sense  nonproducers  is  by  no  means  new. 
Adam  Smith1  wrote,  in  1776,  uAs  soon  as  the  land  of  any 
country  has  all  become  private  property,  the  landlords,  like  all 
other  men,  love  to  reap  where  they  never  sowed,  and  demand  a 
rent  even  for  its  natural  produce."  And  again,  "They  [the 
landlords]  are  the  only  one  of  the  three  orders  whose  revenue 
costs  them  neither  labor  nor  care,  but  comes  to  them,  as  it 
were,  of  its  own  accord,  and  independent  of  any  plan  or 
project  of  their  own."-  Economists  from  Adam  Smith  down 
have  generally  agreed  on  this  point,  though  they  have  not  gen- 
erally agreed  that  this  is  the  great  cause  of  poverty,  nor  that  the 
abolition  of  ground  rent  would  be  a  social  panacea. 

Ricardo,  in  developing  his  theory  of  rent,  laid  emphasis  upon 
the  fact  that  rent  arises  from  the  niggardliness  rather  than  from 
the  bounty  of  nature,  thus  taking  a  position  opposed  to  that 
of  the  French  physiocrats.  This  niggardliness  shows  itself  in 
two  ways  :  first,  the  best  land  is  always  limited  in  area  ;  second, 
its  productivity  is  limited.  On  any  given  area  the  amount  of 
any  crop  which  can  be  produced  is  limited ;  and  even  before 
that  limit  is  reached,  diminishing  returns  are  received  from 
successive  applications  of  labor  and  capital.  Because  of  these 
limitations  upon  the  productivity  of  the  best  land,  poorer  and 
poorer  land  must  be  taken  into  cultivation  as  the  demand  for 
products  increases.  The  fortunate  possessors  of  the  better 
grades  of  land  are  then  in  a  position  to  demand  a  rent  for 
their  land. 

The  single  tax  made  an  engine  of  social  reform  by  Henry 
George.  It  was  the  late  Henry  George,  in  his  book  entitled 
"  Progress  and  Poverty,"  who  seized  upon  these  ideas  to  make 

1  Wealth  of  Nations,  Bk.  I,  chap.  vi. 
-Wealth  of  Nations,  Bk.  I,  chap.  xi. 


THE  SINGLE  TAX  733 

the  single  tax  an  engine  of  social  reform.  He  began  his  inquiry 
by  pointing  out  that  even  in  the  midst  of  plenty,  poverty  still 
persisted.  He  stated  that  though  the  productive  power  of  the 
world  had  increased  many  fold  through  mechanical  improve- 
ments, nevertheless  large  numbers  of  people  remained  in  pov- 
erty. In  fact.,  he  went  so  far  as  to  insist  that  increasing  numbers 
were  compelled  to  live  in  conditions  of  increasing  squalor. 

The  persistence  of  poverty  the  great  reproach  upon  civilization. 
This  phenomenon  of  the  persistence  of  poverty  in  spite  of  the 
world's  increase  in  productive  power  has  been  an  enigma  ever 
since  the  rise  of  mechanical  industries.  Various  answers  have 
been  given  to  the  puzzle.  Karl  Marx  and  his  followers  attrib- 
uted it  to  the  fact  that  the  owners  of  capital  absorb  all  the  bene- 
fits of  the  increase  in  productive  power,  leaving  the  nonowners 
of  capital  no  advantage  whatsoever. 

It  is  very  easy  to  say — in  fact,  it  looks  like  mere  arithmetic 
to  say — that,  with  the  same  rate  of  productiveness,  if  certain 
classes  who  are  now  receiving  large  incomes  should  not  receive 
them,  there  would  be  more  left  for  other  people.  If  the  incomes 
of  capitalists  and  landowners  were  cut  off,,  more  would  be  left 
for  the  laborers,  provided  the  total  production  remained  the 
same.  It  would  be  equally  true  from  an  arithmetical  stand- 
point to  say  that  if  the  skilled  laborers  and  the  high-salaried 
people  did  not  receive  so  much,  more  would  be  left  for  the  rest, 
if  the  rate  of  production  remained  the  same.  In  other  words, 
if  one  assumes  a  given  rate  of  production,  and  then  assumes 
that  the  incomes  of  certain  classes  are  cut  off,  one  can  demon- 
strate that  this  would  leave  more  goods  for  the  other  classes. 
This,  however,  is  not  a  convincing  argument.  If  anyone  per- 
forms an  important  function  in  society.,  and  thereby  makes 
society  richer,  it  cannot  be  said  that  by  cutting  off  this  person's 
reward  for  performing  his  function,  society  will  be  improved. 
By  the  cutting  off  of  his  reward  there  is  the  danger  of  killing  the 
goose  that  laid  the  golden  eggs:  by  so  doing  we  may  reduce 
his  motive  for  labor  and  cause  him  to  perform  a  less  important 
function  than  he  would  if  he  were  adequately  rewarded  for  his 


734  PRINCIPLES  OF  NATIONAL  ECONOMY 

effort.  The  real  question  is,  therefore,  whether  the  capitalist 
performs  a  function  in  society  commensurate  with  the  reward 
which  he  receives.  If  the  answer  is  in  the  affirmative  the  cutting 
off  of  his  income  would  hardly  be  a  help  to  society.  The  same 
reasoning  applies  to  the  landowner :  if  he  performs  a  function 
commensurate  with  the  reward  which  he  receives,  it  would 
obviously  not  help  matters  to  cut  off  his  income.  So  here  again 
the  real  question  is  whether  or  not  the  landowner  performs  a 
function  commensurate  with  the  reward  which  he  receives. 

Distinction  between  location  value  and  fertility  value.  In 
Chapter  XVI  we  saw  that  the  two  economic  factors  in  land 
value  are  location  and  fertility.  In  so  far  as  the  value  of  land 
is  based  primarily  on  its  fertility,  that  value  may  be  easily 
destroyed  and  with  difficulty  replaced ;  and  in  fact  the  land  of 
little  fertility  may,  by  careful  and  scientific  farming,  be  greatly 
increased  in  fertility.  This  increase  would  be  classed  as  im- 
provement, and  the  increase  in  value  would  be  similar  to  the 
increase  which  results  from  ditching,  draining,  irrigating,  fenc- 
ing, clearing,  and  other  forms  of  improvement.  Even  where  the 
land  possesses  original  fertility  (that  is,  where  it  is  known  as 
virgin  soil)  it  may  easily  deteriorate  under  bad  management  or 
improve  under  good  management.  It  is  as  much  in  the  interest 
of  society  that  good  land  be  kept  from  deteriorating  as  that 
poor  land  be  improved  in  fertility.  If  the  owner  of  land  is 
allowed  the  advantages  of  any  improvements  in  fertility  which 
result  from  his  management,  no  one  could  of  course  consistently 
object  to  it.  Again,  if  he  is  made  to  suffer  some  penalty  for 
allowing  the  land  to  deteriorate  in  fertility  by  his  bad  manage- 
ment, it  would  seem  equally  just. 

Putting  these  two  propositions  together,  it  seems  as  though 
the  owner  of  the  land,  whether  it  be  good  or  poor  land,  should 
be  rewarded  for  any  improvement  resulting  from  his  good 
management  and  penalized  for  any  deterioration  resulting  from 
his  bad  management.  If  the  single  tax  were  applied  rigidly, 
and  the  value  not  only  of  the  location  but  of  the  soil  itself 
were  taxed  away,  the  owner  would  get  neither  reward  nor  pen- 


THE  SINGLE  TAX  735 

alty.  That  is  to  say,  if  he  were  taxed  for  the  full  value  of  his 
land,  while  the  soil  possessed  its  original  fertility,  he  could 
easily  "mine"  the  soil,  as  it  is  called  ;  that  is,  he  could  rapidly 
exhaust  the  fertility  and  pocket  the  temporary  advantage  from 
it.  Then,  after  the  land  became  less  valuable,  the  tax  would 
have  to  come  down  or  the  owner  could  abandon  the  land  or  turn 
it  over  to  the  state  whenever  it  became  so  poor  as  not  to  be 
worth  the  tax. 

But  if  he  is  allowed  the  full  value  of  the  fertility  of  his  soil 
he  has  a  much  stronger  motive  for  preserving  or  increasing  its 
fertility.  In  the  pursuit  of  this  advantage,  or  in  the  warding 
off  of  the  disadvantage  of  deterioration,  he  performs  an  impor- 
tant public  function, — that  of  conserving  the  fertility  of  the 
soil.  His  reward  will  bear  some  ratio  to  the  value  of  the  service 
which  he  performs.  To  cut  off  his  reward  would  not  be  to  the 
advantage  of  the  public,  because  the  result  would  be  that  he 
would  allow  the  soil  to  deteriorate,  and  this  would  result  in  a 
smaller  production.  The  rest  of  society  would  suffer  from  this 
policy  along  with  the  landowner.  The  single  tax  would  put  the 
owner  in  the  position  of  a  tenant  who  had  to  pay  the  state,  in 
the  form  of  a  tax,  all  that  the  land  would  rent  for.  Tenants  are 
notoriously  and  for  excellent  reasons  careless  in  the  matter  of 
conserving  soil  fertility. 

In  respect  to  location  value  this  argument  scarcely  applies. 
In  some  cases,  it  is  true,  the  enterprise  of  the  landowner  has 
created  location  value.  This  occurs  when  he  himself  builds  a 
road  instead  of  asking  the  public  to  do  it,  or  when  he  beautifies 
a  spot  and  makes  it  attractive  as  a  place  for  dwellers,  or  when 
he  builds  a  trolley  line  or  any  other  means  of  access  to  his  land. 
He  may  then  be  said  to  have  created  the  location  value  of  his 
land.  In  such  cases  all  that  we  have  said  regarding  fertility 
value  will  apply  also  to  location  value. 

In  most  cases,  however,  the  location  value  is  not  the  creation 
of  the  individual  owner  but  of  the  general  public,  since  it  is  the 
general  public,  rather  than  the  individual  owner,  that  builds 
schools,  libraries,  and  streets,  maintains  police  systems,  and 


736  PRINCIPLES  OF  NATIONAL  ECONOMY 

brings  various  utilities  within  reach.  Many  notorious  cases  are 
cited  of  men  who  have  bought  land  favorably  situated  and  have 
done  nothing  to  improve  it,  having  even  resisted  taxation  and 
all  improvements.  Yet  in  spite  of  such  inertia  these  men  have 
found  themselves  rich  as  the  result  of  the  rise  in  the  location 
value  of  the  land.  A  few  such  conspicuous  cases  furnish  popu- 
lar arguments  in  favor  of  the  single  tax,  though  they  are  of  no 
great  scientific  value  unless  they  are  numerous  enough  to  absorb 
an  appreciable  fraction  of  the  national  wealth. 

A  land  tax  not  necessarily  a  single  tax.  The  arguments  for 
a  single  tax  are  not  the  same  as  for  a  mere  increase  of  the  land 
tax.  One  may  favor  the  increase  of  taxation  upon  the  location 
value  of  land  without  being  in  any  sense  of  the  word  a  single- 
taxer.  He  may  believe  in  many  different  taxes,  such  as  the 
inheritance  tax,  licenses,  the  income  tax,  etc.  It  would  be 
absurd  to  call  such  a  man  a  single-taxer,  even  though  he  favored 
a  special  tax  on  the  location  value  of  land.  Again,  even  though 
one  were  in  the  strict  sense  of  the  word  a  single-taxer,  one  might 
advocate  it  on  purely  financial  grounds  rather  than  on  the 
grounds  of  social  reform ;  that  is,  one  might  believe  that  all 
public  revenues  should  be  raised  from  the  taxation  of  location 
values  of  land  merely  because  he  believed  that  this  would  be  an 
easy  way  of  raising  revenue,  and  not  because  it  would  go  very 
far  toward  the  curing  of  poverty. 

The  financial  arguments  in  favor  of  the  land  tax  are  fairly 
simple.  Land  cannot  be  hidden  in  the  way  that  much  personal 
property  is.  There  may  be  some  difficulty  in  appraising  its 
value  for  purposes  of  taxation,  but  the  difficulty  is  not  greater 
than  that  of  appraising  for  purposes  of  taxation  the  value  of 
personal  property,  buildings,  or  anything  else  which  is  taxable. 

Again,  a  tax  on  location  values  could  hardly  be  said  to  have  a 
repressive  effect  at  all.  If  the  tax  on  the  products  of  industries 
tends  to  discourage  production,  this  cannot  be  said  to  be  true 
of  land.  Since  location  values  are  not  produced  by  the  payer 
of  the  tax,  there  is  no  production  to  discourage.  You  may  tax 
land  and  still  have  it  in  undiminished  quantities.  As  a  cold- 


THE  SINGLE  TAX  737 

blooded  financial  proposition  this  has  some  merit.  Even  though 
one  may  take  away  from  the  landowner  all  its  location  value, 
the  land  itself  still  exists  in  undiminished  quantities,  and  its 
productivity  is  in  no  way  affected. 

Arguments  for  the  single  tax.  The  argument  for  the  single 
tax  as  an  engine  of  social  reform  rests  on  three  general  propo- 
sitions. In  the  first  place.,  since  those  who  receive  rent  because 
of  the  location  of  their  land  create  nothing  in  return  for  the 
rent  they  receive,  their  incomes  are  merely  subtracted  from 
those  of  the  rest  of  society.  If  their  incomes  should  be  taken 
away,  this  would  not  in  any  degree  diminish  the  total  produc- 
tiveness of  the  community.  By  a  mere  process  of  arithmetic 
it  is  easy  to  show  that  if  the  incomes  which  they  now  receive 
were  divided  among  the  rest  of  the  people,  these  other  people 
would  have  larger  incomes. 

Is  land  kept  out  of  use  for  speculation  ?  In  the  second 
place,  it  is  alleged  that  a  great  deal  of  land  is  kept  out  of  use  for 
speculative  purposes  and  that  a  high  tax  on  land  values  would 
force  this  land  into  use.  The  validity  of  this  argument  is 
doubtful.  The  illustrations  given  are  usually  those  of  tracts  of 
land  found  lying  idle  in  cities  and  suburbs.  The  owners  are 
holding  them  apparently  in  the  hope  of  getting  a  higher  price 
in  the  future.  It  is  easy  to  jump  to  the  conclusion  that  if  there 
were  no  prospect  of  gain  by  so  doing,  the  owners  would  at  once 
find  a  use  for  the  land  or  sell  it  to  others  who  could  use  it ;  but 
this  does  not  take  into  consideration  the  fact  that  there  may  be 
no  immediate  use  to  which  the  owner  could  profitably  put 
the  land. 

If  an  individual,  Jones  by  name,  has  a  tract  of  land  which  is 
not  being  used,  there  is  no  reason  for  believing  that  he  would 
be  averse  to  getting  some  income  year  by  year  while  the  land 
itself  is  rising  in  value  on  his  hands.  Thus  he  would  get  the 
rise  of  the  value  of  the  land  just  the  same  as  though  it  were 
idle,  and  he  would  get,  at  the  same  time,  whatever  income  it 
would  bring  him.  There  are  not  many  men  who  deliberately 
prefer  a  smaller  to  a  larger  income.  If  he  knew  that  by  putting 


738  PRINCIPLES  OF  NATIONAL  ECONOMY 

$1000,  into  even  a  small  building  or  Si 00,000  into  a  large  one 
he  could  rent  the  building  for  enough  to  pay  the  interest  on 
what  it  cost  him,  together  with  insurance,  deterioration,  etc., 
and  have  left  even  a  small  sum  in  addition,  he  would  certainly 
be  willing  to  have  the  small  additional  sum.  If,  however,  he 
did  not  see  the  opportunity  to  use  or  rent  such  a  building,  but, 
on  the  contrary,  foresaw  that  he  would  be  obliged  to  lose  a  part 
of  the  interest,  insurance,  or  deterioration,  there  would  be  no 
motive  for  him  to  have  it  built.  In  that  case,  even  if  he  had  to 
pay  the  single  tax,  he  would  still  leave  the  land  idle.  He  would 
rather  pay  the  single  tax  without  additional  loss  than  to  pay  it 
and  incur  an  additional  loss  besides. 

The  only  common  cases  in  which  the  land  is  actually  kept  out 
of  use  because  of  speculation  are  where  garden  land  is  pur- 
chased and  divided  into  building  lots  in  advance  of  the  demand 
for  them.  After  the  division  has  been  made  the  land  is  no 
longer  suitable  for  farm  land  or  garden  tracts  because  it  is 
broken  up  into  parcels  too  small  to  be  cultivated  economically. 
Meanwhile  the  public  may  be  slow  in  buying  the  lots  for  build- 
ing. The  result  is  that  for  a  number  of  years  this  land  practi- 
cally goes  to  waste. 

A  heavy  tax  on  land  would  exempt  other  forms  of  property. 
A  third  argument  for  the  single  tax  is  to  the  effect  that  when  a 
large  amount  of  revenue  is  raised  from  a  tax  on  land,  there  is  no 
necessity  for  so  high  a  tax — probably  no  necessity  for  any  tax 
whatever — on  other  things.  This  reduction  of  taxation  on 
other  forms  of  property  would  serve  as  a  stimulus  to  greater 
production.  When,  for  instance,  a  farmer  finds  that  his  cattle, 
his  crops,  and  his  buildings  are  not  taxed,  or  not  taxed  so.  heav- 
ily, he  is  encouraged  to  develop  these  forms  of  property.  If,  as 
stated  above,  the  taxation  of  location  values  of  land  enables 
the  public  to  raise  enough  revenue  from  this  source  and  thereby 
to  eliminate  the  taxes  on  all  other  things,  this  will  tend  to  stimu- 
late business  and  production  in  general.  This  argument  is 
based  on  the  repressive  character  of  other  forms  of  taxation 
than  the  land  tax. 


THE  SINGLE  TAX  739 

It  is  probably  true  that  if  the  incomes  of  landowners  which 
come  to  them  in  the  form  of  rent  or  location  value  were  cut  off, 
more  would  be  left  to  divide  among  others ;  that  if  land  values 
were  taxed  away,  a  few  owners  would  be  forced  to  use  land 
which  is  now  idle ;  and  that  if  a  heavy  tax  were  put  on  the 
location  value  of  land,  the  taxes  on  other  things  could  be  greatly 
reduced,  thereby  stimulating  production.  The  combined  result 
of  these  three  things  would  be  to  the  profit  of  the  nonlandowning 
classes.  The  unskilled  laborers  and  other  poor  people  Would 
probably  gain  a  fraction  of  this  general  advantage,  along  with 
all  other  nonlandowning  classes,  such  as  merchants,  bankers, 
manufacturers,  professional  men,  and  skilled  laborers ;  but 
that  it  would  greatly  alleviate  poverty  is  a  proposition  which 
may  be  regarded  as  very  doubtful. 

Putting  idle  talent  to  work.  A  fourth  argument,  not  usually 
brought  forward  by  single-taxers,  may  be  added  to  this  list.  In 
so  far  as  certain  owners  of  valuable  land  are  enabled  to  live  on 
the  rent  which  comes  to  them  because  of  its  location  value  and 
to  remain  idle  instead  of  doing  productive  work,  the  community 
loses  the  productive  power  of  these  men.  This  is  more  impor- 
tant than  all  the  land  kept  out  of  use  for  speculative  purposes. 
If  such  persons  were  deprived  of  their  incomes  and  thereby 
forced  to  do  productive  work,  the  community  would  gain  by 
this  addition  to  its  list  of  productive  workers.  This  would  make 
for  national  prosperity.  How  great  would  be  the  gain  to  be 
expected  from  this  source  would  depend  upon  how  many  men 
of  talent  are  kept  out  of  productive  work  by  reason  of  their 
ability  to  live  idly  on  the  rent  which  they  receive  from  the  loca- 
tion value  of  their  land.  If  only  a  few  such  men  are  to  be  found 
the  loss  may  not  be  worth  considering.  If  there  is  a  large 
leisure  class  supported  mainly  from  the  rent  of  land,  it  con- 
stitutes a  serious  drag  upon  the  prosperity  and  progress  of  the 
country.  If  this  class  could  be  made  to  earn  its  living  in  useful 
work,  it  would  be  an  important  factor  in  national  prosperity. 


CHAPTER  LV 
THE  LIMITS  OF  STATE  INTERFERENCE 

"  There  ought  to  be  a  law  against  it ! "  is  a  statement  that  we 
hear  on  every  hand  nowadays,  regarding  almost  anything  that 
the  speaker  does  not  happen  to  like.  So  long  as  this  statement 
merely  expresses  the  speaker's  opinion  that  something  or  other 
ought  not  to  be,  or  so  long  as  it  is  merely  an  expression  of  his 
disapproval  of  something  that  is  taking  place,  it  does  no  harm ; 
but  when  it  is  taken  literally  by  voters  and  lawmakers  they  are 
likely  to  attempt  to  regulate  a  multitude  of  things  by  law  which 
would  be  better  left  unregulated.  To  say,  however,  that  a  thing 
would  be  better  left  unregulated  is  not  the  same  as  saying  that 
it  is  right  or  that  it  is  working  satisfactorily.  It  may  merely 
mean  that  more  harm  will  be  done  in  trying  to  regulate  it 
than  the  thing  would  do  if  it  were  left  unregulated. 

Some  control  necessary.  It  was  shown  in  Chapter  V  that 
some  degree  of  government  control  over  individual  conduct  is 
necessary,  first,  because  of  certain  conflicts  of  interest  among 
individuals  and,  second,  because  of  the  incompetence  of  cer- 
tain defective  individuals  or  individuals  of  low  mentality  to 
look  after  their  own  interests.  No  economist  has  ever  ques- 
tioned the  necessity  of  some  government  control  over  the  activi- 
ties of  individuals.  How  far  the  state  should  go  in  its  regulation 
and  control  of  individual  conduct  is  a  matter  upon  which  there 
is  a  wide  difference  of  opinion.  One  school  has  inclined  toward 
a  restriction  of  government  control  to  a  few  of  the  most  im- 
portant cases,  leaving  the  individual  of  mature  years  and  sound 
mind  to  find  his  own  place  in  the  economic  system  and  to  make 
his  own  economic  adjustment  to  his  fellows  on  the  basis  of 
voluntary  agreement  or  free  contract.  Other  schools  advocate 

a  general  extension  of  the  authority  and  control  of  the  govern- 

740 


THE  LIMITS  OF  STATE  INTERFERENCE  741 

ment  over  more  and  more  of  the  affairs  of  individuals,  grad- 
ually enlarging  the  field  wherein  things  are  done  under  the 
system  of  authority  and  obedience  and  narrowing  down  the 
field  wherein  they  are  done  by  voluntary  agreement  among  free 
citizens.  The  term  laissez-faire  is  sometimes  applied  to  the 
former  school,  implying  that  its  followers  believe  in  the  "let  go" 
or  "let  alone"  policy  of  government.  Various  names  are  ap- 
plied to  the  other  schools,  depending  upon  how  far  they  pro- 
pose to  extend  the  field  of  authority  and  obedience  or  to  restrict 
the  field  of  voluntary  agreement  or  free  contract. 

The  laissez-faire  school.  We  shall  consider,  first,  the  laissez- 
faire  school  and  the  underlying  assumptions  on  which  its 
policy  must  be  based.  There  has  been  much  misapprehension 
on  this  subject  and  not  a  little  misstatement.  A  recent  book, 
"Economics  for  the  General  Reader,"1  by  Henry  Clay,  states 
four  assumptions  as  underlying  the  laissez-faire  policy :  ( i )  that 
of  rational  self-interest,  or  "that  individuals  in  their  economic 
relations  can  be  relied  on  to  pursue  their  own  interest,  and 
that  their  action  will  be  rational  and  informed";  (2)  that 
competition  leads  to  the  survival  of  the  fittest,  or  "that  com- 
petition in  industry  will  result  in  the  survival  of  the  socially 
fittest";  (3)  that  wealth  will  ordinarily  be  the  result  of  social 
service,  or  "that  as  a  rule  private  wealth  or  property  will  be 
acquired  only  by  service";  and  (4)  that  market  values  and 
social  values  are  identical,  or  "that  market  values  correspond 
roughly  with  social  values  and  are  an  adequate  indicator  of 
need  for  production  to  follow." 

It  may  be  true  that  there  have  been  advocates  of  a  laissez- 
faire  policy  who  have  made  some  or  all  of  these  assumptions. 
If  one  believed  that  government  was  omniscient  and  omnipotent 
and  could  without  difficulty  and  without  cost,  either  in  the 
form  of  money,  man  power,  or  irritation,  control  human  con- 
duct in  any  way  it  saw  to  be  wise,  then  the  best  reason  one 
could  give  for  government's  keeping  its  hands  off,  or  letting 
things  alone,  would  be  that  things  were  working  well  enough 

!Pp.  370-371.    New  York,  1919. 


742  PRINCIPLES  OF  NATIONAL  ECONOMY 

anyway  and  could  not  be  improved  even  by  such  an  ideally 
perfect  government.  If  anyone  saw  anything  going  wrong  or 
anyone  doing  that  which  was  socially  inexpedient,  and  if  he 
understood  that  an  all-wise  and  all-powerful  government  could, 
without  cost  or  disadvantage  of  any  kind,  compel  the  individual 
to  do  that  which  was  expedient,  he  could  not  reasonably  do 
other  than  ask  that  the  government  act  in  the  matter  and  cor- 
rect the  evil.  If,  for  example,  he  were  convinced  that  on  the 
whole  the  cigarette  or  jazz  music  did  slightly  more  harm  than 
good,  or  that,  if  it  could  be  eliminated  without  cost  or  disad- 
vantage in  any  form,  more  good  than  harm  would  result  from 
its  loss,  and  if  he  believed  that  the  government  could  eliminate 
it  without  harm  or  disadvantage  of  any  kind,  he  would,  as  a 
good  economist,  demand  that  the  government  act  in  the  matter 
and  eliminate  it.  But  if  he  believes  that  the  government  is  not 
able  to  do  any  such  thing  without  a  great  deal  of  cost,  in  the 
form  of  money,  man  power,  irritation,  or  something  else,  it  is 
an  entirely  different  story.  In  the  case  of  a  vice  that  is  not  very 
destructive  it  might  do  more  harm  to  try  to  repress  it  than  to 
let  it  flourish ;  only  in  the  case  of  a  very  destructive  vice  would 
it  do  more  harm  to  allow  it  to  flourish  than  the  government 
would  be  likely  to  do  in  trying  to  repress  it. 

Politics  no  better  than  business.  With  such  a  view  of  gov- 
ernment one  may  believe  in  a  laissez-faire  policy  without  mak- 
ing any  of  the  assumptions  mentioned  by  Clay.  It  would  be 
quite  as  near  the  truth  to  paraphrase  the  charges  against  the 
laissez-faire  theorists  by  charging  the  advocates  of  government 
interference  and  regulation  with  assuming  (i)  that  voters  are 
dominated  by  rational  self-interest  or  that  individuals  in  their 
political  relations  can  be  relied  on  to  vote  for  their  own  interest, 
and  that  their  voting  will  be  rational  and  informed;  (2)  that 
political  competition,  or  politics,  will  result  in  the  election  of 
the  socially  fittest;  (3)  that  public  office  and  political  power 
will  ordinarily  be  the  result  of  social  service,  or  that  as  a  rule 
public  office  and  political  power  will  be  acquired  only  by  serv- 
ice ;  and  (4)  that  political  values  (that  is,  power  to  get  votes) 


THE  LIMITS  OF  STATE  INTERFERENCE  743 

and  social  values  are  identical,  or  ''that  political  values  corre- 
spond roughly  with  social  values  and  are  an  adequate  indicator 
of  need  for  production  to  follow." 

At  the  end  of  the  chapter  on  Protectionism  it  was  shown  that 
men,  if  left  to  themselves  to  buy  and  sell  what  they  like,  will 
frequently  develop  market  valuations  or  prices  which  are  not 
true  indexes  of  social  utility ;  but  doubt  was  expressed  as  to 
whether  politics  was  capable  of  correcting  these  evils  except 
in  extreme  cases.  A  man  may  have  a  rather  poor  opinion  of 
the  average  individual  in  business  and  his  ability  to  pursue  his 
own  interest  on  the  market,  but  if  he  has  a  still  poorer  opinion 
of  the  same  average  individual  in  politics  and  his  ability  to 
pursue  either  his  own  or  the  public's  interest  at  the  polls,  he 
will  very  consistently  prefer  not  to  have  average  citizens  in 
politics  interfering  too  much  with  average  citizens  in  business. 
Again,  he  might  be  exceedingly  pessimistic  as  to  the  results  of 
economic  competition,  believing  that  rascality  and  predation 
frequently  succeed  as  against  honesty  and  production ;  but  if 
he  is  still  more  pessimistic  as  to  the  results  of  political  competi- 
tion, believing  that  rascality  and  predation  succeed  even  more 
frequently  in  politics  than  in  business,  he  will  consistently 
regard  unregulated  economic  competition  as  less  evil  than 
wholesale  government  interference.  Again,  he  may  believe  that 
property  and  wealth  frequently  accrue  to  men  who  have  not 
earned  them  by  any  corresponding  social  service ;  but  if  he 
believes  that  government  offices  and  political  power  and  influ- 
ence still  more  frequently  go  to  men  who  have  not  earned  them 
by  any  corresponding  social  service,  he  may  consistently  prefer 
the  results  of  economic  competition  to  those  of  control  by 
politics  or  by  those  who  manage  to  get  elected  to  office  by 
political  methods.  Finally,  he  may  see  very  clearly  that  market 
values  and  social,  values  are  frequently  far  apart ;  that  many 
things  of  little  real  worth  sell  on  the  market  at  a  high  price  and 
others  of  great  worth  at  a  low  price ;  but  if  he  sees  equally 
clearly  that  ideas  of  no  social  value  frequently  have  high  value 
as  vote-getters,  and  others  of  high  social  value  have  no  value 


744  PRINCIPLES  OF  NATIONAL  ECONOMY 

at  all  as  vote-getters,  he  may  very  consistently  consider  market 
values  as  a  less  unsafe  guide  to  production  than  political  values. 

The  question  is  not  how  much  confidence  one  has  in  the 
wisdom  or  disinterestedness  of  the  people  but  whether  he  thinks 
the  people  show  greater  average  wisdom  in  their  economic  than 
in  their  political  activities,  or  vice  versa.  The  believer  in  a 
laissez-faire  policy  may  believe  merely  that  men  generally  show 
more  wisdom  or  less  unwisdom  in  their  business  dealings  or 
economic  activities  than  in  their  political  activities,  whereas  the 
believer  in  a  general  policy  of  regulation  must  believe  that  men 
show  more  wisdom  or  less  unwisdom  in  their  political  than  in 
their  business  activities. 

The  case  of  free  speech.  The  question  of  freedom  of  speech 
will  serve  as  an  example.  It  would  be  absurd  to  charge  the 
advocate  of  freedom  of  speech  with  assuming  that  everyone 
who  talks  will  talk  intelligently  or  that  his  talk  will  be  "rational 
and  informed";  that  competition  in  speech  (that  is,  discussion) 
will  always  or  generally  result  in  the  survival  of  the  fittest 
ideas;  or  that  talk  that  results  in  the  greatest  profit  to  the 
talker  will  ordinarily  be  the  most  useful  to  the  community ;  etc. 
He  may  believe  none  of  these  things :  he  may  be  convinced  that 
a  great  deal  of  foolishness  results  from  freedom  of  speech,  that 
infinite  harm  is  done  by  some  talkers  who  mislead  the  people. 
I  doubt  whether  he  could  seriously  contend  that  false  or  mislead- 
ing talk  or  teaching  does  less  harm  than  predatory  business,  and 
yet  he  may  be  a  firm  believer  in  free  speech  merely  because  he 
thinks  that  attempts  by  the  government  to  interfere  with  it 
result  in  even  greater  harm.  The  argument  may  not  be  con- 
vincing to  him  when  he  is  told  that  the  government  represents 
the  people  and  that  the  people  will  vote  for  those  officers  who 
suppress  certain  talkers  and  against  those  officers  who  let  them 
talk.  He  may  not  believe  that  the  people  voted  wisely  when 
they  elected  these  official  censors  or  refused  to  elect  officers  who 
would  not  act  as  censors.  He  may  believe  that  the  result  of 
the  people's  votes  in  such  cases  will  be  worse  than  any  that 


THE  LIMITS  OF  STATE  INTERFERENCE  745 

would  be  likely  to  follow  the  policy  of  letting  the  talkers  alone ; 
that  is,  a  laissez-faire  policy  with  respect  to  speech. 

No  kind  of  freedom  more  sacred  than  any  other.  Possibly 
someone  may  resent  the  idea  of  comparing  freedom  of  speech 
with  freedom  of  business.  Freedom  of  speech  and  of  the  press 
are  sometimes  spoken  of  as  though  they  were  in  a  class  by 
themselves  and  not  to  be  compared  with  other  forms  of  free- 
dom, least  of  all  with  freedom  of  enterprise  or  freedom  to  do 
business.  I  know  of  no  sound  reason  for  making  such  a  dis- 
tinction, unless  the  personal  preference  of  the  individual  who 
is  making  the  distinction  be  considered  a  sound  reason.  As  a 
matter  of  fact,  freedom  to  most  of  us  means  nothing  more  than 
freedom  to  do  what  we  want  to  do.  It  takes  an  unusual  person 
to  prize  freedom  as  an  abstract  principle  or  to  grow  enthusiastic 
over  the  freedom  to  do  something  that  he  had  never  cared  to 
do  or  thought  of  doing. 

Since  different  people  want  to  do  such  different  things,  it 
follows  that  they  develop  very  different  ideas  as  to  what  free- 
dom means.  A  great  many  Americans  have  been  energetic  and 
enterprising  in  business, — have  loved  to  do  things  on  their  own 
initiative.  Freedom  to  them  has  consequently  meant  freedom 
of  enterprise.  Others  have  loved  to  talk,  to  write,  or  to  teach. 
These  activities  rather  than  business  enterprise  are  their  favor- 
ite modes  of  self-expression ;  consequently  freedom  does  not 
mean  much  to  them  unless  it  includes  freedom  of  speech  and  of 
the  press.  The  enterprisers  have  not  always  been  as  zealous  for 
freedom  of  speech  and  of  the  press  as  for  freedom  of  enterprise, 
and  the  talkers  and  writers  are  often  willing  to  sacrifice  freedom 
of  enterprise  while  contending  vigorously  for  freedom  of  speech. 
Others  care  very  little  for  freedom  of  speech  and  still  less  for 
freedom  of  enterprise.  All  they  want  is  a  weekly  pay  envelope. 
They  would  as  soon  get  their  pay  envelope  from  a  government 
as  from  a  private  enterprise  and  from  one  kind  of  government 
as  from  another.  They  are  for  any  government  that  promises 
them  a  fat  envelope  witli  freedom  to  spend  it  as  they  please. 


746  PRINCIPLES  OF  NATIONAL  ECONOMY 

Freedom  of  self-indulgence.  It  is  interesting  and  instruc- 
tive to  note  how  in  certain  foreign  countries  the  claim  is  made 
that  there  is  less  freedom  in  America  than  there.  Productive 
enterprises  are  much  freer  here  than  there ;  men  are  freer  to 
seek  their  fortune  in  all  sorts  of  useful  employment  here  than 
there ;  there  is  much  freer  discussion  of  public  questions,  both 
in  open  forums  and  the  public  press;  but  here  there  is  less 
freedom  to  indulge  their  animal  appetites  than  they  find  at 
home.  This  is  the  only  respect  in  which  they  are  freer  than  we. 
Since  we  do  not  prize  this  so  very  greatly  we  are  not  conscious 
of  any  serious  restrictions  upon  our  freedom,  but  they  doubtless 
feel  much  freer  in  their  own  lands  than  they  would  if  they 
came  here. 

This  tendency  to  prize  freedom  to  do  merely  what  we  like  to 
do,  rather  than  freedom  for  everybody  to  do  anything  that  is 
useful  and  to  seek  the  legitimate  rewards  of  his  usefulness, 
seems  to  the  laissez-faire  theorist  to  explain  why  freedom  makes 
such  slow  progress.  To  him  it  seems  that  we  should  clarify  our 
thinking  if  we  were  to  realize  that  no  one  kind  of  freedom  is 
any  more  sacred  than  any  other  and  that  no  kind  is  an  end  in 
itself.  We  should  still  further  clarify  our  thinking  and  ration- 
alize our  policy,  from  his  point  of  view,  if  we  were  to  realize 
that  each  and  every  kind  must  meet  the  test  of  social  utility, 
that  no  one  is  entitled  to  freedom  to  do  anything  that  is  con- 
trary to  the  public  good,  that  freedom  to  produce,  freedom  to 
consume,  and  freedom  to  speak  and  write  are  all  alike  and  to 
an  equal  extent  subject  to  that  limitation.  It  seems  to  him 
that  when  we  once  clearly  realize  this,  and  when  all  of  us  begin 
working  consistently  for  freedom  in  its  larger  sense  rather  than 
in  its  narrow,  fragmentary,  and  personal  sense,  there  will  be  a 
new  birth  of  freedom. 

This  does  not  imply,  however,  that  men,  if  left  to  themselves, 
will  always  do  what  is  right  or  socially  useful.  They  will  do 
many  things  that  are  socially  useless  or  even  harmful.  But  to 
say  that  a  thing  is  harmful  or  that  it  ought  not  to  be  done  is 
not  the  same  as  saying  that  the  government  should  repress  it. 


THE  LIMITS  OF  STATE  INTERFERENCE           747 

Government  repression  requires  the  use  of  force  and  generally 
a  good  deal  of  prying  and  espionage  in  order  to  find  evidence. 
We  may  try  to  rob  these  things  of  their  repulsiveness  and 
make  them  as  attractive  as  possible  by  introducing  a  kind  of 
ceremonialism  into  judicial  procedure,  but  to  the  laissez-faire 
theorist  they  are  still  repulsive  and  are  to  be  used  only  where 
the  thing  they  are  trying  to  prevent  is  more  repulsive  than  they. 
In  many  cases  a  socially  harmful  thing  really  does  less  harm  if 
let  alone  than  the  government  would  do  if  it  tried  to  repress  it. 
Anyone  who  is  convinced  of  this  may  very  consistently  favor 
a  laissez-faire  policy  with  respect  to  the  thing  in  question.  In 
short,  the  only  necessary  assumption  of  a  laissez-faire  policy  is 
that  government  regulation  or  repression  is  costly.  With  this 
assumption  agreed  upon,  the  question  then  becomes,  Are  the  re- 
sults of  repression  or  regulation  worth  as  much  as-  they  cost  ? 
A  more  accurate  and  detailed  statement  of  the  question  would 
be,  Are  the  evils  to  be  repressed  greater  than  those  that  accom- 
pany the  work  of  repression,  and  are  the  evils  to  be  removed  by 
regulation  greater  than  those  that  accompany  the  work  of  regu- 
lation ?  When  it  is  once  understood  that  this  is  the  question, 
the  method  of  procedure  must  be  to  consider,  appraise,  and 
compare  the  evils  on  both  sides. 

Difficulty  of  measuring  cost.  Unfortunately  there  is  no  in- 
strument of  precision  by  means  of  which  we  can  weigh  or  meas- 
ure these  evils.  The  appraisal  must  be  largely  a  matter  of 
judgment,  and  judgment  must  be  largely  a  matter  of  tempera- 
ment, sometimes  of  prejudice.  Those  who  temperamentally  or 
otherwise  care  greatly  for  freedom  of  consumption  and  see  no 
serious  evils  connected  with  freedom  to  consume  whatever  one 
likes  may  decide  against  sumptuary  regulations  on  what  to  them 
are  purely  utilitarian  grounds.  Others  who  see,  or  think  they  see, 
that  certain  forms  of  consumption  are  doing  great  harm  may 
with  equal  consistency  decide  in  favor  of  what  seems  the  lesser 
evil  of  regulation  or  repression  of  those  specific  forms  of  con- 
sumption. Again,  those  who  prize  greatly  freedom  to  talk  or 
who  think  that  it  does  not  matter  much  if  people  are  misled  by 


748  PRINCIPLES  OF  NATIONAL  ECONOMY 

bad  talk  or  false  teaching  will  very  likely  decide  either  against 
any  regulation  or  to  limit  the  work  of  regulation  to  the  most 
extreme  cases,  where,  for  example,  the  very  life  of  the  nation 
may  be  at  stake.  Others  who  do  not  see  that  freedom  to  talk 
is  so  very  important  or  who  believe  that  great  harm  results  from 
bad  teaching  may  be  a  little  more  liberal  in  their  use  of  political 
power  in  the  repression  or  regulation  of  speech.  Finally,  they 
who  do  not  care  greatly  for  material  wealth,  or  who  do  not  see 
that  any  great  harm  is  done  if  a  few  men  here  and  there  do  get 
more  than  their  just  share,  may  decide  that  the  evils  of  unregu- 
lated business  are  not  great  enough  to  justify  a  large  amount 
of  interference ;  whereas  those  who  care  greatly  about  such 
things,  who  are  deeply  resentful  if  someone  gets  more  than  his 
share  or,  if  not  resentful  on  their  own  account,  simply  feel  that 
it  does  great  harm  if  a  man  here  and  there  is  getting  too  much, 
will  naturally  go  in  for  more  regulation. 

Partly  a  matter  of  temperament.  On  the  other  side  of  the 
case  something  will  depend  also  upon  one's  temperamental  at- 
titude toward  government  and  its  agents.  One  who  does  not 
feel  that  it  is  a  very  serious  thing  to  have  police  officers  and 
other  agents  of  the  government  prying  around,  gathering  evi- 
dence regarding  possible  violation  of  sumptuary  regulations, 
espionage  laws,  factory  acts,  etc.,  is  likely  to  be  very  com- 
placent toward  rather  minute  regulations.  Others,  who  feel 
differently  toward  the  government  and  its  agents,  are  likely 
to  feel  more  or  less  impatient  toward  any  except  the  most 
necessary  regulations. 

These  temperamental  and  emotional  differences  will  always 
make  it  difficult  for  people  to  agree  on  the  precise  limits  of 
government  interference,  but  it  is  worth  something  to  have  the 
problem  stated  in  terms  of  comparative  cost  and  divested  of 
unnecessary  assumptions.  Under  the  doctrine  of  comparative 
cost,  of  course,  there  is  room  for  much  variation.  The  evil 
to  be  repressed  may,  in  some  cases,  be  so  great  as  to  call  for 
repression  in  spite  of  the  clumsiness,  inefficiency,  or  even  the 
corruption  of  government.  That  is  no  more  extreme  than  say- 


THE  LIMITS  OF  STATE  INTERFERENCE  749 

ing  that  a  material  product  may  be  so  valuable  as  to  justify  its 
production,  even  though  the  instruments  of  production  may  be 
very  poor  and  the  actual  cost  may  be  four  times  the  necessary 
cost.  A  product  of  considerable  value,  however,  may  not  be 
worth  its  cost  when  the  technique  of  production  has  not  been 
developed,  and  may  be  more  than  worth  its  cost  after  that 
technique  has  been  developed.  Similarly,  when  the  technique 
of  control,  regulation,  and  repression  has  been  highly  developed 
we  may  find  it  advantageous  to  regulate  consumption,  speech, 
and  production  vastly  more  than  is  now  expedient. 


CHAPTER  LVI 


What  the  liberalist  believes.  A  liberalist  in  economics  is  one 
who  believes  in  the  freedom  of  the  individual  rather  than  in 
compulsion,  either  by  the  mass  or  by  a  despot.  He  relies  mainly 
but  not  exclusively  upon  individual  initiative.  He  believes  that 
individuals  will,,  without  compulsion  and  under  freedom  of  con- 
tract, do  whatever  is  necessary  to  provide  for  the  needs  of  the 
community.  He  believes  that  it  is  not  necessary  continually 
to  impose  upon  the  individual  the  authority  either  of  a  benevo- 
lent despot  or  of  a  well-meaning  majority.  In  somewhat  ex- 
treme cases,  such  as  can  be  covered  by  the  criminal  law,  laws 
for  the  enforcement  of  contracts  and  other  obligations,  and 
laws  for  the  standardization  of  various  aspects  of  business, 
compulsion  is  necessary  and  helpful.  He  believes  that  the  inter- 
ests of  the  public  are  expressed  quite  as  accurately  on  the  mar- 
ket and  through  the  price  lists  as  through  the  ballot  box  and  the 
statute  books.  He  believes  even  that  poverty  and  most  of  the 
social  ills  can  be  eliminated  under  the  system  of  voluntary 
agreement — freedom  to  accumulate,  to  own,  and  to  operate 
private  property — and  without  subjecting  individuals  to  the 
necessity  of  becoming  government  employees. 

Freedom  versus  compulsion.  There  are  only  two  ways  of 
getting  men  to  do  what  is  necessary  for  their  own  maintenance 
and  that  of  the  public :  one  is  to  induce  them  by  the  offer  of  a 
reward,  either  of  a  material  or  of  an  immaterial  kind ;  the  other 
is  to  compel  them  by  authority.  For  example,  an  army  can  be 
recruited  and  men  led  to  fight  for  their  country  either  by  the 
volunteer  system  or  by  conscription.  The  one  is  the  method  of 
freedom ;  the  other  is  compulsory  so  far  as  the  individual  is 

concerned,  whether  the  government  be  despotic  or  democratic. 

750 


CONSTRUCTIVE  LIBERALISM  751 

In  the  case  of  despotism  a  despot  exercises  compulsion  over  the 
individual ;  in  the  case  of  a  democracy  it  is  the  mass  which 
exercises  the  compulsion.  On  general  grounds  popular  govern- 
ment is  very  much  better  than  despotism,  but  so  far  as  the 
conscripted  individual  is  concerned  he  has  no  more  choice  as  to 
whether  he  will  fight  or  not  in  one  case  than  in  the  other. 

Industries  may  likewise  be  recruited  under  the  volunteer  sys- 
tem or  by  conscription.  Men  may  be  induced  to  work  on  the 
farms  and  in  the  factories  and  mines  by  the  offer  of  wages, 
profits,  etc.  or  they  may  be  directed  by  authority  to  do  so. 

If  no  one  were  allowed  to  accumulate  capital  or  to  own  a 
farm  or  a  factory  or  a  mine  we  should  have  much  less  freedom 
to  choose  our  own  occupations  and  to  direct  ourselves  than  we 
have  under  a  system  of  free  private  enterprise  and  voluntary 
agreement.  Even  in  an  army  the  higher  officers  are  not  con- 
scripted, though  there  is  a  story  of  a  man  who  went  into  hiding, 
there  to  remain  until  the  government  should  begin  to  draft 
captains.  Under  a  regime  of  complete  government  ownership 
and  operation  men  would  have  to  be  chosen  by  authority  for  the 
higher  as  well  as  for  the  lower  positions  in  the  industrial  system. 

Opposed  to  socialism.  That  there  would  be  less  freedom 
under  universal  government  ownership  than  under  private  own- 
ership will  be  clear  to  anyone  who  will  stop  dreaming  long 
enough  to  think  about  it.  No  one  could  begin  farming  on  his 
own  initiative  under  that  system,  but  would  have  to  be  placed 
in  charge  of  a  farm  or  told  to  work  under  a  boss,  according  as 
those  in  authority  should  decide.  Under  a  liberalistic  system 
anyone  who  can  handle  a  farm  successfully  can  become  a 
farm  manager  and  ultimately  a  farm-owner,  as  thousands  have 
already  done.  By  serving  an  apprenticeship  as  a  farm  hand 
under  a  free  contract  with  another  free  man,  if  the  farm  hand 
is  a  success  he  can  always,  after  a  few  years  of  experience,  be- 
come a  share  renter.  Again,  by  making  a  contract  with  another 
free  man,  if  he  can  make  a  success  of  this  he  can  in  a  few  more 
years  become  a  cash  renter.  Again,  if  he  is  successful  he  can 
become  a  mortgaged  owner  and,  finally,  an  unmortgaged  owner. 


752  PRINCIPLES  OF  NATIONAL  ECONOMY 

Every  stage  of  this  advancement  is  conditioned  upon  his 
making  a  success  of  the  next  lower  stage.  If  he  can,  according 
to  the  philosophy  of  liberalism  it  is  economical  of  the  human 
resources,  as  well  as  of  the  farms,  that  he  should  be  advanced 
until  he  finds  his  level.  If  he  cannot  make  a  success  in  any  one 
of  these  stages  it  is  a  sign  that  he  has  reached  or  passed  his  level, 
that  he  has  risen  as  far  as,  or  farther  than,  it  is  economical  that 
he  should  rise.  It  would  be  a  waste  of  both  human  and  material 
resources  to  advance  him  farther.  If,  for  example,  he  can  suc- 
ceed as  a  farm  manager  it  would  be  wasting  a  good  manager  to 
leave  him  in  the  position  of  a  farm  hand.  In  the  interests  of 
the  community  he  should  advance.  But  if  he  would  make  a 
poor  manager  it  would  be  wasting  other  labor,  as  well  as  mate- 
rial equipment,  to  have  them  placed  under  his  management. 
Under  the  system  of  free  contract  each  man  tends  to  find  the 
place  in  the  industrial  system  in  which  he  can  best  fit.  This  is 
the  method  of  trial  and  error.  Each  individual  tries  himself 
out  and  does  not  have  to  wait  for  the  consent  of  someone  else. 
Under  the  system  of  universal  government  operation  the 
would-be  farmer  would  have  no  better  chance  to  test  himself, 
or  to  advance  on  his  own  initiative,  than  he  now  has  in  the 
army  or  in  the  civil  service. 

The  liberalist  believes  that,  in  general,  the  volunteer  plan  is 
better  than  the  compulsory  one.  There  are,  of  course,  occa- 
sions when  compulsion  becomes  necessary.  These  are  usually 
occasions  of  acute  and  instant  necessity,  when  there  is  not  time 
for  the  market  to  adjust  itself  and  to  organize  a  volunteer 
system. 

In  time  of  war  compulsion  takes  the  place  of  freedom.  So- 
cialists are  in  the  habit  of  saying  that  in  time  of  war  nations 
turn  to  socialism.  It  is  true  that  in  time  of  war  compulsion  is 
generally,  or  at  least  to  a  considerable  degree,  substituted  for 
freedom ;  but  the  whole  business  of  war  is  compulsion.  Our 
dealing  with  foreign  enemies  is  necessarily  on  a  compulsory 
rather  than  on  a  voluntary  and  contractual  basis,  and  the  whole 
organization  of  society  may  have  to  be  changed  from  freedom  to 


CONSTRUCTIVE  LIBERALISM  753 

compulsion  in  order  to  carry  on  the  compulsory  business  of  war. 

There  are  a  multitude  of  minor  forms  of  compulsion  besides 
war  itself.  Taxation  is  a  compulsory  payment  of  money  to 
the  government.  Conscription  is  compulsory  military  service. 
Forced  loans  are  compulsory  in  a  high  degree.  The  censorship 
of  the  press  is  merely  compulsory  regulation  of  the  business  of 
selling  talk  for  private  profit.  It  may  be  necessary,  in  order 
to  prosecute  a  war  successfully,  to  resort  to  compulsion  in  re- 
cruiting munition  factories  and  even  farms.  Rationing  the 
population  in  time  of  food  scarcity  may  be  necessary. 

In  a  regime  of  universal  compulsion  some  must  necessarily  be 
treated  better  than  others.  Even  though  conscription  be  carried 
out  without  personal  favor,  the  result  works  to  the  disadvan- 
tage of  those  drawn  by  conscription  as  compared  with  those  not 
drawn.  Those  on  whom  the  lot  falls  act  as  shock  absorbers 
for  the  rest  of  the  community.  There  is  nothing  particularly 
democratic  about  this,  though  it  may  be  the  best  possible  way 
of  meeting  a  national  crisis.  Under  such  conditions,  when  the 
life  of  a  nation  is  at  stake,  it  does  not  stop  for  the  niceties  of 
social  justice.  Necessity  knows  no  law.  It  is  probable,  how- 
ever, that  as  a  result  of  several  years  of  this  compulsion  there 
will  be  so  much  dissatisfaction  and  sense  of  unfairness  as  to 
provoke  a  strong  reaction  against  compulsion  and  in  favor  of 
the  volunteer  system,  not  only  in  the  work  of  fighting  but  in 
business  and  industrial  pursuits  as  well.  We  may  consider 
ourselves  fortunate  if  this  reaction  does  not  carry  us  too  far  in 
the  direction  of  license  and  impatience  with  all  restraint. 

Dangers  of  freedom.  Freedom  of  trade — freedom  to  buy 
and  sell,  to  offer  and  accept  rewards — is  a  part  of  the  program 
of  liberalism.  There  are,  however,  some  very  serious  results 
which  accompany  freedom  of  bargaining.  We  saw  in  Chapter  L 
that  the  advantage  in  bargaining  is  always  on  the  side  of 
those  who  are  trying  to  sell  something  which  is  undersupplied 
or  of  those  who  are  trying  to  buy  something  which  is  oversup- 
plied.  Conversely,  the  disadvantage  is,  of  course,  on  the  side 
of  those  trying  to  sell  something  which  is  oversupplied  and  of 


754  PRINCIPLES  OF  NATIONAL  ECONOMY 

those  trying  to  buy  something  which  is  undersupplied.  When 
there  is  a  long-continued  oversupply  of  certain  commodities  or 
of  certain  kinds  of  labor,  those  who  are  under  the  disadvan- 
tage of  trying  to  sell  them  feel,  naturally  enough,  that  the  ad- 
vantages of  free  contract  are  not  so  very  great,  since  they  are 
playing  a  losing  game.  They  are  frequently  willing  to  take 
their  chances  under  some  form  of  compulsion,  feeling  that  they 
could  not  be  much  worse  off  than  they  are  under  the  system  of 
free  contract. 

The  situation  of  those  trying  to  sell  something  that  is  over- 
supplied,  especially  if  it  happens  to  be  labor,  is  summarized  in 
the  statement  that  "  liberty  is  frequently  the  liberty  to  starve." 
It  must  be  confessed  that  liberty  is  dangerous,  even  though  it  is 
very  precious.  Severe  conditions  are  imposed  on  free  men. 
Liberty  to  be  on  the  street  may  mean  liberty  to  get  run  over  by 
an  automobile.  Liberty  to  go  swimming  may  mean  liberty  to 
drown.  Liberty  to  sail  the  seas  may  mean  liberty  to  get  ship- 
wrecked. Children  who  are  restrained  in  their  liberty  and  are 
forbidden  to  be  on  the  street  are  in  less  danger  of  being  run 
over,  and  those  who  are  prevented  from  going  in  swimming  are 
in  less  danger  of  being  drowned.  Liberty  is  a  terrible  thing, 
but  at  the  same  time  it  is,  for  grown  men,  beyond  price.  Liberty 
to  buy  and  sell  may  mean  liberty  to  become  bankrupt.  The  in- 
dividual who  has  a  guardian  to  forbid  him  to  do  any  bargaining 
whatsoever  may  be  saved  from  bankruptcy. 

Advantages  and  disadvantages  of  freedom  of  contract.  We 
saw  in  Chapter  L  that  when  farm  products  are  oversupplied, 
as  they  were  in  the  early  nineties  of  the  last  century,  the 
farmer  is  at  a  disadvantage  in  bargaining.  When  he  was  com- 
pelled to  take  low  prices  for  his  products,  in  many  cases  he  was 
impoverished.  There  are  only  two  possible  ways  out  of  such 
a  difficulty :  the  first  way  is  to  restore  the  equilibrium  between 
the  demand  and  the  supply,  so  that  the  prices  of  products  shall 
rise  to  a  remunerative  level  and  the  farmer  be  enabled  to  bar- 
gain advantageously ;  the  second  is  for  the  government  to  exer- 
cise its  power  of  compulsion  in  favor  of  the  farmer  and  against 


CONSTRUCTIVE  LIBERALISM  755 

those  who  have  the  advantage  on  the  market.  At  other  times, 
as  during  the  World  War,  the  reverse  of  these  conditions  is 
found  to  exist.  The  consumer  is  the  one  who  is  at  a  disadvan- 
tage, since  he  is  trying  to  buy  undersupplied  goods.  Again, 
there  are  two  ways  out:  first,  to  increase  the  products  and 
restore  the  equilibrium  between  the  demand  and  the  supply ; 
second,  for  the  government  to  resort  to  some  sort  of  compul- 
sion in  favor  of  the  consumer  and  against  the  farmer  or  the 
dealer.  The  liberalist  is  one  who  prefers  to  restore  the  equilib- 
rium and  then  allow  the  free  bargaining  process  to  go  on. 

In  much  the  same  way  there  has  been  what  seems  like  a 
chronic  oversupply  of  the  lower  grades  of  unskilled  labor.  This 
has  made  it  difficult  for  the  unskilled  laborers  to  secure  remu- 
nerative wages;  that  is,  wages  high  enough  to  support  their 
families  in  comfort.  At  the  time  of  the  World  War  there 
appeared  to  be  a  scarcity,  or  at  least  there  was  no  longer  such 
an  oversupply  of  labor  as  formerly.  Immigration  from  Europe 
had  almost  ceased,  and  at  the  same  time  the  country  was  trying 
to  expand  various  lines  of  production. 

In  ordinary  times,  however,  for  some  hundreds  of  years  back, 
the  unskilled  laborer  has  been  at  a  disadvantage.  A  great  many 
sympathetic  people  have  assumed  that  there  was  something 
inherent  in  the  nature  of  labor  that  put  the  laborer  at  a  disad- 
vantage, and  something  inherent  in  the  nature  of  capital  that 
put  the  capitalist  at  an  advantage  in  the  bargaining  process. 
This  is  not  true,  although,  as  we  have  seen  above,  conditions 
have  generally  been  more  favorable  for  the  capitalist  than  for 
the  unskilled  laborer.  But  whenever  and  wherever  unskilled 
labor  has  been  hard  to  find,  the  advantage  has  been  quite  as 
much  on  the  side  of  the  unskilled  laborer  and  the  disadvantage 
quite  as  much  on  the  side  of  the  employer.  Whenever  it  has 
been  possible  for  an  employer  to  hang  out  his  shingle  saying 
"Men  Wanted"  and  have  ten  men  apply  for  each  position,  the 
conditions  have  been  favorable  for  the  employer  and  unfavor- 
able for  the  laborer.  The  fact  that  there  are  more  men  apply- 
ing for  jobs  than  there  are  jobs  to  be  had  is  a  sure  indication 


756  PRINCIPLES  OF  NATIONAL  ECONOMY 

of  an  oversupply  of  labor.  The  case  is  parallel  to  that  which 
would  exist  if  a  buyer  of  wheat  could  hang  out  a  sign  "Wheat 
Wanted"  and  have  many  times  more  wheat  offered  than  he 
could  buy.  That  would  be  a  sure  indication  of  the  oversupply 
of  wheat.  On  the  other  hand,  if  a  farmer  should  put  up  a  sign 
which  read  "Wheat  for  Sale"  and  find  that  many  more  buyers 
than  he  could  supply  were  coming  to  purchase  wheat,  that  fact 
would  indicate  an  undersupply  of  wheat.  Similarly,  if  a  la- 
borer, by  putting  out  a  sign  "Job  Wanted"  should  have  sev- 
eral employers  coming  after  him,  this  fact  would  indicate  an 
undersupply  of  labor. 

Making  the  advantages  even  on  the  two  sides.  The  policy  of 
the  constructive  liberalist  is  indicated  by  these  observations. 
It  is  his  opinion  that  conditions  can  be  created  under  which  the 
average  employer  will  find  it  as  hard  to  get  a  man  to  work  for 
him  at  liberal  wages  as  the  man  will  find  it  to  get  an  employer 
to  hire  him  at  those  wages.  When  that  is  accomplished  the 
advantages  in  bargaining  will  be  about  even.  Labor  will  no 
longer  be  under  a  handicap  in  the  bargaining  process.  Laborers 
will  no  longer  feel  the  need  of  some  compulsory  restriction 
upon  bargaining,  but  will  feel  quite  able  to  take  care  of 
themselves  without  help  from  the  government  or  any  other 
compulsory,  agency. 

A  program  looking  in  this  direction  may  take  a  little  longer 
to  work  out,  but  from  the  point  of  view  of  the  constructive 
liberalist  the  results  once  achieved  are  vastly  preferable  to  any 
achieved  under  a  compulsory  system.  There  is  an  old  story 
about  a  wagoner  one  of  whose  wagon  wheels  got  into  a  deep 
rut.  Instead  of  trying  to  extricate  it  he  sat  down  by  the 
side  of  the  road  and  called  upon  Hercules  to  aid  him.  The 
story  goes  that  Hercules  replied  that  if  the  man  would  put  his 
shoulder  to  the  wheel  he  could  get  out  of  the  difficulty  without 
calling  on  outside  help.  This,  according  to  the  liberalist,  rep- 
resents a  general  tendency  in  human  nature.  The  government 
is  our  Hercules,  and  whenever  we  get  into  difficulties  we  are 
in  the  habit  of  sitting  down  and  crying  vociferously  for  the 


CONSTRUCTIVE  LIBERALISM  757 

government  to  come  and  do  something.  Even  though  we  have 
only  the  vaguest  ideas  as  to  what  the  government  could  do,  we 
still  insist  that  it  do  something  or  other.  To  be  sure,  there  are 
some  things  which  only  the  government  can  do.  No  other 
agency  than  the  government  can  be  intrusted  with  any  kind  of 
compulsion ;  and  if  compulsion  is  necessary,  of  course  we  must 
then  call  upon  the  government.  To  paraphrase  an  old  remark, 
the  individual's  extremity  is  the  government's  opportunity. 

"Doing  something"  for  people.  Beneficence  is,  of  course,  a 
characteristic  of  good  government ;  but  many  of  us,  according 
to  the  liberalist,  have  never  reached  the  point  where  we  can 
understand  that  a  " beneficent  letting  alone"  is  sometimes  the 
most  beneficent  thing  the  government  can  give  us.  There  are 
many  people  who  feel  that  when  they  are  ill  the  doctor  must 
"do  something."  They  do  not  realize  that  sometimes  the  most 
beneficent  thing  the  doctor  can  do  is  to  do  nothing.  A  doctor 
whose  desire  is  to  please  his  patients  may  feel  under  some  com- 
pulsion to  do  something  for  them,  even  if  it  is  nothing  more 
than  to  give  them  bread  pills.  From  the  standpoint  of  the 
liberalist  much  of  our  so-called  social  legislation  consists  of 
bread  pills. 

Sometimes,  however,  it  is  really  necessary  that  the  doctor 
should  do  something.  The  doctor  whose  skill  consists  in  his 
ability  to  cure  sickness  rather  than  to  please  patients  will  have 
enough  to  do,  provided  the  people  know  enough  to  appreciate 
him.  The  same  may  be  said  of  a  government.  There  are  a  few 
really  vital  things  that  a  government  may  do.  If  it  succeeds  in 
doing  these  few  things  well,  it  will  then  be  unnecessary  to  do 
the  thousand  and  one  trivial  things  that  it  is  asked  to  do. 

Restriction  of  immigration.  So  far  as  this  country  is  con- 
cerned, probably  the  most  far-reaching  and  constructive  piece  of 
legislation  in  the  last  generation  has  been  the  restriction  of  im- 
migration. This  is  one  of  the  few  acts  of  the  government  which 
go  directly  to  the  root  of  the  difficulty  of  low  wages  and  poverty. 
It  is  an  act  which  definitely  aims  at  reducing  the  oversupply  of 
unskilled  labor.  It  is  true  that  it  does  not  go  far  in  this  direc- 


758 

tion,  but  at  least  it  indicates  to  the  public  that  the  government 
has  recognized  the  source  of  the  difficulty  and  is  no  longer  pro- 
ceeding on  general  guesswork  in  an  attempt  to  overcome  it. 
If  it  will  go  a  little  farther  in  the  same  direction  it  will  make 
unskilled  labor  so  scarce  and  hard  to  find  that  the  unskilled 
laborer  will  no  longer  be  at  a  disadvantage,  but  can  bargain  on 
even  terms  with  employers  and  secure  living  wages  for  himself 
without  help  from  anybody. 

Wherever  any  particular  class  of  labor  is,  for  a  considerable 
period,  scarce  and  hard  to  find,  there  the  conditions  of  labor  are 
good  for  that  class,  and  it  needs  no  social  legislation  for  its 
protection  ;  but  wherever  any  particular  class  of  labor  is  abun- 
dant and  easy  to  find,  there  the  conditions  of  that  class  of  labor 
are  bad  except  where  mitigated  by  the  kindliness  of  individual 
employers  or  by  various  kinds  of  social  legislation,  most  of 
which  are  ineffective. 

So  long  as  labor  is  oversupplied  and  laborers  are  unable  to 
get  good  jobs  the  term  "wage  slavery,"  while  inaccurate  and 
intended  to  mislead,  will  continue  to  convey  a  meaning  to  the 
laboring  man  and  will  be  an  effective  means  of  misleading  him. 
Where  labor  is  scarce  and  hard  to  find  no  one  can  use  that 
term  with  a  straight  face.  So  long  as  the  former  conditions 
prevail,  there  will  be  a  widespread  feeling — and  this  feeling 
will  be  justified — that  the  laborer  is  in  a  helpless  situation, 
so  far  as  economic  laws  are  concerned,  and  that  his  only  hope 
is  in  numbers  and  brute  strength.  When  this  feeling  is  wide- 
spread, laboring  men  will  be  excused,  and  public  opinion  may 
justify  them,  in  the  use  of  violence.  There  will  be  no  effective 
public  opinion  to  support  the  state  in  its  efforts  to  preserve  law 
and  order.  When  there  is  some  approach  to  the  latter  condi- 
tions, there  will  be  an  easy  recognition  of  the  fact  that  the 
laborers  are  not  in  a  helpless  condition  and  that  they  do  not 
need  to  rely  on  numbers  and  brute  strength,  and  public  opin- 
ion will  then  support  the  state  effectively  and  promptly  in  its 
maintenance  of  law  and  order. 


CONSTRUCTIVE  LIBERALISM  759 

While  it  may  not  be  possible  or  desirable  to  reach  such 
extreme  scarcity  of  laborers  and  abundance  of  employers  as 
described  under  the  last-named  condition,  it  is  both  possible 
and  desirable  to  make  some  progress  toward  that  condition  and 
away  from  the  first-named  condition.  We  can  train  a  few  more 
men  to  become  employers — creators  of  business  enterprises— 
and  thus  increase  somewhat  the  number  of  jobs  for  laboring 
men.  This  will  do  our  present  laboring  population  little  good  if 
the  new  jobs  are  promptly  filled  by  immigrants.  There  must 
also  be  a  restriction  of  immigration. 

Results  of  importation  of  capitalists  and  employers.  If  immi- 
grants entered  the  class  of  employers  in  the  same  proportion  as  do 
the  native  born  they  would  not  materially  disturb  the  balance. 
If  they  generally  entered  the  ranks  of  employers  rather  than 
employees  they  would  disturb  the  balance  to  the  advantage 
of  laborers  and  to  the  disadvantage  of  employers.  But  they 
enter  the  laboring  class  almost  exclusively  and  the  class  of 
unskilled  laborers  predominantly.  If  they  were  excluded 
(which  is  not  here  proposed)  our  free  education  and  liberal 
institutions  would  encourage  those  now  here  to  rise  rapidly  out 
of  the  class  of  unskilled  laborers  into  the  better-paid  occupa- 
tions,— better  paid  because  men  are  scarce  who  are  fitted  to 
fill  them.  This  would  soon  make  unskilled  labor,  and  ulti- 
mately all  poorly  paid  labor,  so  scarce  and  hard  to  find  as  to 
put  all  laborers  in  a  strong  position  economically  and  make  it 
unnecessary  for  them  to  resort  to  numbers  and  brute  strength. 
Moreover,  employers  would  have  to  offer  satisfactory  induce- 
ments to  persuade  laborers  to  work  for  them,  and  very  little 
social  legislation  for  the  alleged  protection  of  the  laborers 
would  then  be  necessary. 

Selecting  immigrants.  Better  than  exclusion  would  be  a  plan 
of  restriction  which  would  select  those  who  were  capable  of 
entering  the  well-paid  occupations  and  exclude  those  who  would 
crowd  into  occupations  where  wages  are  already  too  low.  The 
best  way  to  do  this  would  be  to  reverse  our  present  contract- 


760  PRINCIPLES  OF  NATIONAL  ECONOMY 

labor  law  and  admit  only  such  immigrants  as  could  present 
contracts,  signed  by  responsible  employers,  guaranteeing  em- 
ployment at  five  dollars  a  day  for  at  least  a  year.  (It  is  not 
necessary  that  the  wage  should  be  exactly  five  dollars.  That 
figure  is  named  because  it  is  about  the  minimum  on  which  a 
family  can  be  supported  in  comfort  and  decency  in  any  large 
city  in  this  country.  It  is  essential  that  there  be  some  minimum 
wage  attached  to  these  contracts.)  This  would  admit  all  the 
laborers  who  were  really  needed.  No  employer  can  say,  with 
a  straight  face,  that  he  needs  men  so  very  badly  unless  he  is 
willing  to  pay  them  as  much  as  five  dollars  a  day.  At  the  same 
time  it  would  prevent  the  coming  of  hordes  of  cheap  laborers 
whose  influence  is  to  depress  the  wages  of  unskilled  labor.  It 
would  make  the  lower  grades  of  labor  so  scarce  as  to  even- 
tually make  five  dollars  a  day  the  actual  minimum  wage  with- 
out the  difficulty  of  enforcing  a  minimum-wage  law.  This  would 
automatically  take  care,  also,  of  the  distribution  of  our  immi- 
grants, because  they  would  go  only  to  those  places  where  they 
were  badly  needed.  This  would  be  very  much  better  than  any 
immigration  commission  could  distribute  them,  besides  saving 
for  useful  work  the  man-power  that  would  be  wasted  upon 
the  commission. 

The  literacy  test  as  a  means  of  selecting  immigrants  is  vastly 
better  than  no  test  at  all.  This  is  said  with  a  full  recognition  of 
the  fact  that  literacy  is  not  an  invariable  test  of  character. 
Neither  is  it  an  invariable  test  of  fitness  for  the  civil  service  nor 
for  entrance  to  college.  It  is  believed,  however,  that  if  all 
literate  immigrants  are  arranged  in  one  group  and  all  illiterates 
in  another,  the  average  of  the  literates  would  be  above  that  of 
the  illiterates.  Excluding  illiterates  would  therefore  improve 
the  average  quality  of  our  immigrants. 

Again,  the  illiterates  go  predominantly  into  the  unskilled 
trades  where  wages  are  low.  The  exclusion  of  illiterates  there- 
fore tends  to  make  unskilled  labor  scarce,  while  the  admission 
of  literates  would  permit  us  to  get  all  the  skilled  labor  we  need ; 


CONSTRUCTIVE  LIBERALISM  761 

that  is,  to  increase  our  supply  of  any  kind  of  labor  which  can 
in  any  sense  be  said  to  be  scarce. 

It  will  be  observed  that  nothing  has  been  said  in  the  above 
statement  about  race,  religion,  eugenics,  or  anything  of  the 
kind.  The  reasons  given  in  favor  of  the  restriction  of  immi- 
gration are  purely  economic.  They  relate  wholly  to  the  prob- 
lem of  improving  the  conditions  of  the  lower  grades  of  labor. 
The  time  is  probably  coming  when  anyone's  protestations  of 
interest  in  the  cause  of  labor  or  of  social  welfare  will  be  laughed 
out  of  court  unless  he.  is  willing  to  do  the  one  thing  which 
will  really  help  labor;  that  is,  make  it  scarce  and  hard  to 
find,  or  jobs  abundant  and  easy  to  find,  which  comes  to  the 
same  thing. 

Restriction  essential.  Whatever  immigration  policy  is  adopted 
we  must  not  lose  sight  of  the  fact  that  the  essential  thing  is  to 
restrict.  Unless  the  number  of  unskilled  laborers  is  materially 
reduced,  the  immigration  policy  will  do  nothing  for  labor.  If 
the  number  of  unskilled  laborers  is  materially  reduced,  it  will 
tend  to  make  unskilled  labor  scarce  and  hard  to  find.  Our 
democratic  institutions,  under  which  every  human  being  is 
encouraged  to  rise  in  the  economic  scale,  and  our  system  of 
popular  education,  which  makes  it  easy  for  the  rising  genera- 
tion to  avoid  the  unskilled  and  poorly  paid  and  to  enter  the 
skilled  and  highly  paid  occupations,  will  combine  to  thin  out  the 
unskilled  laborers.  These  democratic  institutions,  however, 
will  not  relieve  the  oversupply  of  unskilled  labor  if  we  continue 
to  import  it  in  unlimited  quantities.  Any  kind  of  restriction, 
therefore,  is  better  than  no  restriction.  In  addition  to  the 
literacy  test,  any  other  test  which  will  actually  reduce  the  num- 
bers imported  and  permit  us  to  select  the  more  desirable  appli- 
cants is  a  good  proposal,  though  some  may  be  better  than  others. 

Highly  productive  industries  can  flourish  on  dear  labor.  It 
may  be  objected,  however,  that  without  cheap  labor  some  of 
our  industries  could  not  flourish.  That  may  be  true.  We  have 
to  consider,  however,  whether  an  industry  is  worth  preserving 


762  PRINCIPLES  OF  NATIONAL  ECONOMY 

that  is  in  itself  so  unproductive  or  is  of  such  low  productivity 
as  to  require  cheap  labor  for  its  survival.  The  author's  opinion 
is  that  the  country  would  be  better  off  without  such  industries. 
We  should  still  have  industries  that  were  productive  enough  to 
stand  high  wages.  It  would  be  a  better  country  if  it  were  sup- 
ported exclusively  by  such  industries  than  it  will  be  if  the 
ground  is  cumbered  by  such  barren  fig  trees  as  industries  that 
can  flourish  only  on  cheap  labor. 

Some  general  shifting  about  and  readjustment  would  un- 
doubtedly be  necessary.  Some  indispensable  operations  now 
performed  by  cheap  labor  would  still  have  to  be  performed, 
but  if  the  work  is  indispensable  we  should  simply  pay  high 
wages  to  get  it  done.  Most  of  such  operations,  however,  would 
eventually  be  done  by  machinery.  So  long  as  it  is  cheaper  to 
have  them  done  by  hand  than  by  machinery  they  will  be  done 
by  hand.  When  it  becomes  more  expensive  to  have  them  done 
by  hand  than  by  machinery  they  will  be  done  by  machinery. 
They  who  fear  that  certain  indispensable  operations  cannot 
be  done  at  all  if  we  do  not  have  cheap  labor  apparently  have 
very  little  faith  in  their  own  inventiveness  or  in  that  of  their 
fellow  countrymen. 

The  author  is  fully  aware  that  it  is  money  in  the  pockets  of 
the  business  and  professional  classes  to  have  immigrant  laborers 
come  in  large  numbers.  Numerous  immigrant  laborers  mean 
an  abundant  supply  of  cheap  labor.  An  abundant  supply  of 
cheap  labor  means  reduced  cost  of  production.  Reduced  cost 
of  production  means  either  increased  profits  or  else  lower  prices. 
If  it  means  increased. profits,  that  means  larger  incomes  for  the 
employers.  If  it  means  reduced  prices,  that  means  that  the 
incomes  of  those  who  do  not  have  to  compete  with  the  immi- 
grants will  purchase  more,  but  it  also  means  that  the  incomes 
of  those  who  do  have  to  compete  with  the  immigrants  will  be 
reduced  by  that  competition  and  will  purchase  less.  In  short, 
those  who  do  not  compete  with  the  immigrants  get  a  larger 
share  and  those  who  do  have  to  compete  with  them  will  get 
a  smaller  share  of  the  total  products  of  all  our  industries  when 


CONSTRUCTIVE  LIBERALISM  763 

we  import  vast  numbers  of  cheap  laborers.  Immigration  of 
laborers  rather  than  of  employers  is,  in  other  words,  a  means 
of  increasing  the  inequality  between  laborers  and  employers. 

Dangers  of  an  oversupply  of  cheap  labor.  Even  from  the 
point  of  view  of  the  employing  classes  it  is  a  penny-wise  and 
pound-foolish  policy  to  favor  unrestricted  immigration.  When 
laborers  are  many  they  are,  it  is  true,  in  a  weak  position  in  bar- 
gaining. As  pointed  out  in  Chapter  L,  on  the  market  num- 
bers.count  against  them.  But,  conversely,  they  are  in  a  strong 
position  in  voting  and  fighting.  Here  numbers  count  in  their 
favor.  The  employing  class  is  hereby  warned  to  beware  of  the 
day  when  51  per  cent  of  our  voting  and  fighting  population  is 
in  the  position  of  poorly  paid  wageworkers,  who,  because  of 
their  low  wages,  have  very  little  chance  of  ever  rising  out  of 
that  class.  When  that  happens  they  will  take  charge  of  your 
industries  by  force.  It  is  quite  true,  of  course,  that  they  would 
injure  themselves  in  so  doing,  but  men  frequently  do  things 
through  class  hatred  that  injure  them.  Unrestricted  immigra- 
tion tends  to  increase  the  number  of  such  poorly  paid  wage- 
workers  and  might  easily  carry  it  beyond  the  danger  point. 

A  low  standard  of  living  and  a  high  birth  rate.  But  immi- 
gration from  Europe  and  Asia  is  not  the  only  source  of  over- 
supply  of  unskilled  labor.  The  inordinately  high  birth  rate 
among  the  ignorant  and  unskilled  is  another  large  source  of 
cheap  labor.  Nothing,  apparently,  but  a  rise  in  the  standard  of 
living  will  reduce  the  volume  of  this  stream.  A  rise  in  the 
standard  of  living  means  an  increase  in  the  number  of  things 
which  the  average  man  or  woman  thinks  necessary  to  the  sup- 
port of  the  family.  The  more  things  they  feel  they  must  have 
before  they  can  marry  and  support  a  family,  the  longer  they 
will  postpone  marriage.  The  longer  they  put  off  marrying,  the 
smaller  the  number  of  children  there  will  be  in  the  family, 
partly,  at  least,  because  the  childbearing  period  of  the  wife  is 
reduced.  If  the  age  of  marriage  is  raised  on  the  average  from 
eighteen  to  twenty-three,  there  are  five  less  years  during  which 
the  wife  may  bear  children. 


764  PRINCIPLES  OF  NATIONAL  ECONOMY 

Families  too  small  among  the  educated  classes.  The  restric- 
tion of  immigration  among  the  ignorant  and  unskilled,  of 
course,  has  nothing  to  do  with  the  restriction  of  immigration 
among  the  educated  and  skilled.  The  latter  are  as  free  to  come 
as  when  immigration  was  unrestricted.  Similarly,  a  rise  in  the 
standard  of  living  among  the  ignorant  and  unskilled  has  noth- 
ing to  do  with  the  marriage  and  the  birth  rate  among  the  edu- 
cated and  skilled.  Among  the  latter  classes  the  reform  ought 
to  proceed  in  quite  the  opposite  direction.  There  is  no  doubt 
that  among  these  people  marriages  are  postponed  too  long  and 
the  average  families  are  too  small. 

Increasing  the  supply  of  employers.  The  decrease  in  the 
number  of  people  born  with  the  heredity  and  prospective  train- 
ing which  fit  them  for  skilled  positions  and  for  positions  in  the 
ranks  of  the  employing  class  tends  to  reduce  the  demand  for 
unskilled  labor.  Hitherto  unskilled  laborers  have  suffered  from 
two  causes :  the  fact  that  there  have  been  too  many  unskilled 
laborers  and  the  fact  that  there  have  been  too  few  employers. 
It  is  as  though  in  the  badly  balanced  ration  of  an  individual  or 
an  animal  the  too  abundant  ingredient  (say,  starch)  were  to  be 
increased  more  and  more  and  the  too  scarce  ingredient  (say, 
protein)  were  to  be  decreased  more  and  more.  The  combined 
result  of  increasing  the  one  and  decreasing  the  other  would 
produce  a  more  and  more  unbalanced  ration,  to  the  detriment 
of  the  man  or  the  animal.  The  continuous  increases  in  the 
ranks  of  the  unskilled  laborer  through  immigration  and  the  high 
birth  rate,  and  the  decrease  in  the  highly  skilled  and  managerial 
labor  through  the  postponement  of  marriage  and  various  other 
causes,  have  produced  a  progressively  unbalanced  population, 
tending  to  make  unskilled  labor  very  cheap  and  highly  skilled 
and  managerial  talent  very  dear. 

Fortunately,  the  effect  of  this  combination  of  processes  has 
been  offset,  at  least  partially,  by  our  system  of  popular  educa- 
tion. Such  a  system  of  universal  and  popular  education  has 
the  effect  of  redistributing  talent,  of  taking  young  people  who 
would  otherwise  have  remained  in  the  ranks  of  the  unskilled 


CONSTRUCTIVE  LIBERALISM  765 

and  training  them  for  the  ranks  of  the  skilled,  the  managerial, 
and  the  entrepreneur  class.  This  tends  to  reduce  the  supply  of 
ignorant  laborers  and  increase  the  supply  of  educated  workers. 
If  the  system  of  popular  education  continues  to  improve,  if 
greater  and  greater  restrictions  are  placed  upon  the  importation 
of  unskilled  labor  and  a  higher  standard  of  living  is  acquired  by 
our  own  unskilled  laborers,  the  combined  results  of  these  three 
changes  will  tend  to  make  unskilled  labor  scarce  and  hard  to 
find  and  to  make  jobs  abundant  and  easy  to  find,  thus  giving  the 
unskilled  laborer  the  advantage  not  only  of  retaining  his  liberty 
of  contract  but  of  prospering  under  it.  If  we  carry  out  our 
educational  policy  to  its  logical  limit  and  train  not  only  skilled 
laborers  but  also  managers  and  employers,  and  at  the  same  time 
create  a  more  rational  standard  of  living  and  better  moral  con- 
ditions among  these  classes,  the  combined  results  of  these  two 
policies  (that  is,  training  men  for  the  high  positions  and  en- 
couraging larger  families  among  them)  will  so  increase  the 
numbers  of  the  managerial  class  as  to  take  away  their  present 
advantage  in  the  bargaining  process.  By  following  this  general 
process  throughout  all  ranks  of  society  we  may  expect  in  a 
short  time  so  to  even  up  the  advantages  of  bargaining  as  to  give 
us  something  approximating  equality  without  substituting  com- 
pulsion for  freedom. 

Thrift  and  the  laborer.  The  encouragement  of  thrift  will 
tend  in  the  same  direction  and  will  accelerate  the  process  of 
putting  unskilled  labor  in  a  position  to  prosper  under  freedom. 
It  is  through  thrift  that  capital  accumulates.  When  capital  be- 
comes so  abundant  that  the  average  owner  of  capital  has  great 
difficulty  in  finding  an  opportunity  to  use  it,  he  will  have  to  be 
content  with  a  smaller  share  in  the  products  of  industry. 

The  encouragement  of  productive  enterprise,  the  frank  ac- 
knowledgment of  our  obligation  to  the  man  who  shows  the 
ability  to  plan  a  new  enterprise  and,  what  is  vastly  more  impor- 
tant, to  make  it  actually  succeed,  will  do  a  great  deal  to  expand 
the  opportunities  for  those  of  us  who  do  not  possess  that  kind 
of  ability.  The  more  such  men  we  can  develop  in  our  midst, 


766  PRINCIPLES  OF  NATIONAL  ECONOMY 

the  more  our  industries  will  expand  and  the  more  opportunities 
for  remunerative  employment  there  will  be  for  the  rest  of  us. 

Poverty  easily  curable  under  freedom.  We  need  not  have 
poverty  in  our  midst  a  generation  longer  than  we  want  it.  By 
setting  to  work  deliberately  to  balance  up  our  population,  mak- 
ing ignorance  and  lack  of  skill  to  disappear,  and  making  tech- 
nical training  and  constructive  talent  to  increase,  we  can,  in  a 
short  space  of  time,  make  low  wages  and  poverty  a  thing  of  the 
past.  What  is  even  better,  we  can  do  this  and  still  leave  every- 
one a  free  man.  This  is  the  gospel  of  the  new,  or  constructive, 
liberalism  which  is  destined  to  bring  relief — if  not  to  this  na- 
tion, at  least  to  some  nation  which  has  the  wisdom  to  adopt  it— 
and  which,  when  adopted,  will  keep  that  nation  in  the  position 
of  leadership  among  all  the  nations  of  the  earth. 


A   LIBERALIST'S   PROGRAM   FOR   THE   COMPLETE   ABOLITION   OF 

POVERTY1 

I.    LEGISLATIVE  PROGRAM 

A.  For  the  redistribution  of  unearned  wealth 

1.  By  increased  taxation  of  land  values 

2.  By  a  graduated  inheritance  tax 

3.  By  control  of  monopoly  prices 

B.  For  the  redistribution  of  human  talent 

1.  By  increasing  the  supply  of  the  higher,  or  scarcer,  forms  of  talent 

(a)  By  vocational  education,  especially  for  the  training  of  busi- 

ness men 

(b)  By  cutting  off  incomes  which  support  capable  men  in  idle- 

ness 

2.  By  decreasing  the  supply  of  the  lower,  or  more  abundant,  forms 

of  labor  power 

(a)  By  the  restriction  of  immigration 

(b)  By  the  restriction  of  marriage 

(1)  By  the  elimination  of  defectives 

(2)  By  the  requirement  of  a  minimum  standard  income 

(c)  By  a  minimum-wage  law 

(d)  By  fixing  building  standards  for  dwellings    . 

1  Compare  the  author's  work  entitled  "  Essays  in  Social  Justice,"  chap.  xiv. 
Harvard  University  Press,  1915. 


CONSTRUCTIVE  LIBERALISM  767 

C.  For  the  increase  of  material  equipment 

i.  By  increasing  the  available  supply  of  land  through  reclamation 
(a)  Of  "cut-over"  land 
(6)  Of  stony  land 

(c)  Of  swamp  land 

(d)  Of  arid  land 

II.    NONLEGISLATIVE    PROGRAM 

A.  For  raising  the  standard  of  living  among  the  laboring  classes 

1.  The  educator  as  the  rationalizer  of  standards 

2.  Thrift  and  the  standard  of  living 

3.  Industrial  cooperation  as  a  means  of  business  and  social  education 

B.  For  creating  sound  public   opinion  and  moral   standards  among  the 

capable  ;  for  example  : 

1.  The  ambition  of  the  family-builder 

2.  The  idea  that  leisure  is  disgraceful 

3.  The  idea  that  the  productive  life  is  the  religious  and  moral  life 

4.  The  idea  that  wealth  is  tools  rather  than  a  means  of  gratification 

5.  The  idea  that  the  possession  of  wealth  confers  no  license  for  luxury 

or  leisure 

6.  The  idea  that  government  is  a  means,  not  an  end 

7.  Professional  standards  among  business  men 

C.  For   discouraging   vicious   and   demoralizing   developments   of   public 

opinion  ;  for  example  : 

1.  The  cult  of  incompetence  and  self-pity 

2.  The  gospel  of  covetousness  or  the  jealousy  of  success 

3.  The   idea    that    the   capitalization   of   verbosity '  is    constructive 

business 

COLLATERAL  READING 
Ox  SOCIALISM 

BRASOL,  BORIS.  Socialism  versus  Civilization.  New  York,  1920.  (A  frankly 
hostile  criticism  by  one  who  saw  much  of  European  socialism  from  the  inside.) 

ELY,  RICHARD  T.  French  and  German  Socialism.  New  York,  1911. 
(Excellent  for  its  historical  and  biographical  material.) 

LKROSSIGXOL,  J.  E.  Orthodox  Socialism.  New  York,  1907.  (Probably 
the  best  critical  review  of  the  leading  doctrines  of  Karl  Marx.) 

RAE,  JOHN.  Contemporary  Socialism.  London,  1891.  (Probably  the  fullest 
single  account  of  modern  socialist  movements.) 

SKKLTON,  O.  D.  Socialism.  Boston,  1911.  (An  excellent  critical  exam- 
ination of  the  theories  and  claims  of  socialism.) 


768  PRINCIPLES  OF  NATIONAL  ECONOMY 

ON  COMMUNISM 

HINDS,  W.  A.  American  Communities.  Chicago,  1908.  (The  most  up- 
to-date  account  of  American  communistic  experiments.) 

NORDHOFF,  CHARLES.  The  Communistic  Societies  of  the  United  States. 
New  York,  1875.  (Somewhat  out  of  date,  but  sympathetically  written.) 

NOYES,  J.  H.  History  of  American  Socialisms.  Philadelphia,  1870.  (A  sym- 
pathetic account  by  the  founder  of  the  Oneida  Community.) 

ON  THE  INFLUENCE  OF  GOVERNMENT 

MILL,  JOHN  STUART.  Principles  of  Political  Economy,  Bk.  V,  chaps,  viii, 
ix,  x,  and  xi.  New  York,  1893. 

ON  ANARCHISM 

STIRNER,  MAX  (}OHANN  KASPAR  SCHMIDT).  The  Ego  and  his  Own.  Lon- 
don, 1915.  (The  most  thoroughgoing  advocacy  of  the  idea  which  Nietzsche 
made  popular  under  the  name  of  the  superman.) 

TOLSTOY,  LEO.  The  Slavery  of  our  Times.  New  York,  1900.  (Emotional 
rather  than  analytical.) 

ON  THE  SINGLE  TAX 

FILLEBROWN,  C.  B.    A  Single  Tax  Catechism.    Boston.  1913. 
GEORGE,  HENRY.    Progress  and  Poverty.    New  York,  1914. 


INDEX 


Acreage,  wide,  249 

Adams,  Henry  C.,  619,  623 

Advertising,  323  ;  and  salesmanship,  425 

Agriculture,  scientific,  280;  commercial, 
284 

Anarchism,  and  socialism,  723 ;  emo- 
tional, 728 

Animals,  power  from,  180,  183,  308 

Antidumping  argument  for  protection, 
449 

Bacheller,  Irving,  70  note 

Bagehot,  74 

Balance-of-trade  argument  for  protec- 
tion, 445 

Balanced  nation,  258 

Ballot  a  check  upon  compulsion,   102 

Banana,  the,  252 

Bank  check,  origin  of,  398 

Bank  of  England,  403 

Bank  notes,  403 

Bank   of  the  United   States,   old,   404 

Banks,  origin  of,  395 ;  elements  of 
safety,  395 ;  reserves,  396 ;  essential 
work  of,  397 ;  national  and  state, 
407 

Bargaining,  comparative  advantages 
in,  506;  collective,  508;  group  as 
unit  for,  509 

Bastable,  C.  F.,  652 

Boundaries,  in 

Brands  and   trade-marks,  424 

Brown,  H.   G.,  466  note 

Buckle,  Henry  Thomas,  143,  252  note 

Budgets,  household,  613 

Bullock,  C.  J.,  292  note 

Capable  race,  characteristics  of  a,  125 

Capital,  definition  of,  159,  163,  189; 
how  increased,  164;  productivity  of, 
201,  532;  balanced,  250;  migration 
of,  263 ;  marginal  productivity  of, 
531 ;  marginal  productivity  deter- 
mined by  quantity,  534 ;  reason  for 
scarcity  of,  537 

Capitalist  and  laborer,  196 

Carlyle,  Thomas,  325 

Cattle  trail,  the  Texas,  273 


769 


Christian  communism,  early,  715 
Civilization,  value   of,   123;   types  of, 
228;  pent-up  versus  expanding  type, 

253 

Clay,  Henry,  741 

Clearing  house,  the,  399 

Closed  shop,  511 

Collective  bargaining,  508;  labor  pro- 
gram, 690 

Colonizing,  226 

Comforts,    585 

Communism,  meaning  of,  713 ;  and 
anarchism,  714;  experiments  in,  715; 
primitive  Christian,  715;  Spartan, 
716;  in  medieval  monasteries,  716; 
on  Mount  Tabor,  716;  results  of, 
721 

Communistic  societies,  American,   718 

Competing  power  of  a  nation,  609 

Competition,  63,  64;  fair,  120;  inter- 
national, 6n 

Compulsion,  versus  voluntary  agree- 
ment, 69;  dangers  of,  101 ;  checked 
by  ballot,  102  ;  elimination  of,  622  ; 
occasional  necessity  for.  703 ;  versus 
freedom,  713 

Confidence  and  economy,   77 

Conflict,  of  interests,  34;  forms  of,  59; 
necessitating  control,  727 

Consumption,  competitive,  68;  luxuri- 
ous, 96;  meaning  of,  565;  im- 
portance of,  566 ;  ratio  of,  to 
production,  .  567;  rational,  versus 
lavish,  573;  private,  in  war  time, 
663 

Contract,  102;  enforcement  of,  81,  105 

Cooperation,  a  form  of  competition, 
65;  where  successful,  66;  fields  for, 
67 

Cooperative  society,  the,  222 

Corporation,  the,  214;  some  weak- 
nesses of,  215 

Cost,  356;  is  disinclination,  357;  op- 
portunity, 357;  of  production,  358; 
kinds  of,  359;  pain,  360;  increasing, 
360 

Courage,   131 

Covetousness,  134 


770 


PRINCIPLES  OF  NATIONAL  ECONOMY 


Credit,  and  speed  of  circulation,  387 ; 
agricultural,  408 

Crime,  definition  of,  62 

Crises,  financial,  427;  theories  of,  428 

Crops,  location  of  best,  142 ;  advan- 
tages of  heavy-yielding,  250 

Cultivation,  margin  of,   517 

Currency,  token,  373;  credit,  381;  an 
elastic,  407 

Date,  the,  252 

Decencies,  585 

Demand  and  supply,  344;  physiolog- 
ical basis  of  the  law  of,  347 

Dependableness,  128 

Desires,  kinds  of,  16;  balanced,  17; 
satiability  of,  18;  determine  human 
activity,  37;  expansion  of,  354 

Diminishing  returns,  law  of,  281 ;  and 
increasing  cost,  361 ;  from  land, 
400 

Division  of  labor,  definition  of,  166; 
contemporaneous,  172;  successive, 
172;  territorial,  174;  international, 
176;  a  problem  of  distribution,  487 

Division  of  product,  great  social  prob- 
lem, 489 

Drainage  of  wet  land,  232 ;  in  Hol- 
land, 232 

Dunbar,  Charles  F.,  399 

Economic  activities,  methods  of  con- 
trol of,  72 

Economics,  branches  of,  2 

Economizing  space,  245 

Economy,  importance  of  study  of,  3; 
meaning  of,  5 ;  necessity  for,  6 ;  and 
confidence,  77 

Effort,  irksomeness  of,  356 

Ely,  Richard  T.,  299 

Energy,  solar,  184 

Environment,  importance  of,  141 

Exchange,  13;  domestic  and  foreign, 
401 ;  advantages  of  free,  443 

Extractive  industries,  instability  of,  277 

Farm  Loan  system,  Federal,  412 
Farming,  dry,  235;  "two-story,"  246; 

intensive,  246 

Federal  Reserve  system,  400,  405 
Fidelity,  132 
Fish  culture,  289 
Fisher,  Irving,  388 
Fishing,  270 
Forestry,   288 
Forethought,  127 
Free  trade  versus  protection,  444 


Freedom,  of  speech,  744;  for  self- 
indulgence,  746;  versus  compulsion, 
750;  replaced  by  compulsion  in  war 
time,  752;  dangers  of,  753;  of  con- 
tract, advantages  and  disadvantages, 
754 

George,  Henry,  732 

Gold  prices,  stability  of,  368 

Goods,  economic,  39;  different  classes 

of  consumers',  584 
Government,  325 
Grazing,  271 ;  in  the  West,  271 ;  on  the 

Great  Plains,   273 
Gresham's  law,  385 

Hadley,  A.  T.,  303  note 

Harmony,  34;  of  human  interests,  84 

Heredity  and  training,  138 

Hinds,  W.  A.,  718  note 

Home-market  argument  for  protec- 
tion, 446 

Homestead  Act  (1862),  239 

Honesty,   130 

Household  management  and  national 
economy,  9 

Humboldt,  252 

Hunting,  267 

Huntington,  Ellsworth,   145,  430 

Immigration,  effect  on  standard  of 
living,  503 ;  restriction  of,  757 

Income  and  expenditure,  public,  n 

Industrial  depression,  428 

Industrial  Revolution,  291 

Industries,  primary,  50,  267 ;  second- 
ary, 50;  the  indoor,  228,  252;  in- 
stability of  extractive,  277;  genetic, 
278;  "productive,"  460 

Infant-industries  argument  for  pro- 
tection, 447 

Interest,  meaning  of,  526;  distin- 
guished from  rent,  527;  distin- 
guished from  profits,  528;  relation 
to  value  and  price,  544;  functional 
theory  of,  544 

Irrigation,  236 

James,  William,  137 
Jevons,  William  Stanley,  430 
Johnson,  John,  107 
Jones,  Edward  D.,  429 

Kipling,  144 

Labor,  definition  of,  158;  organiza- 
tion of,  177;  coordinating,  197; 


INDEX 


771 


productive  and  unproductive,  326; 
contributes  to  national  prosperity, 
331;  price  of,  484;  storehouse  of, 
590;  programs,  classification  of,  679 

Laborer  and  capitalist,  196 

Laissez-faire,  defined,   740 

Land,  157,  162;  scarcity  of,  109; 
definition  of,  159;  mineral,  163; 
legal  meaning,  226;  waste,  229; 
stony,  230;  dry,  234;  acid  and 
alkali,  238;  noneconomic  properties 
of,  241 ;  economic  properties  of, 
242;  desirability  of,  516;  different 
grades  of,  519;  differences  in  pro- 
ductivity of,  520;  value  to  com- 
munity, 522 

Laws,  need  for,  74 ;  sumptuary,  598, 
606 

Leisure  class,  90 

Liability,  limited,  215 

Liberalism,   750;   and  socialism,  751 

Location,  importance  of,  154 

Lumbering,  274 

Luxuries,  587 

McCulloch,  J.  R.,  589,  651 

Machinery,  farm,  147,  182;  advan- 
tages of,  170;  competition  with, 
171 

Malthus,  501 

Man  power,  conservation  of,  571 ;  in 
war  time,  669 

Marginal  product,  475 

Market,  first  law  of,  345 

Marketing,  as  a  social  function,  318; 
essentials  of  successful,  416;  farm 
products,  417;  cooperative,  418 

Marriage,  age  of,  139 

Marshall,  Alfred,  292,  456  note,  586, 
631  note 

Marx,  Karl,  699 

Mead,  Elwood,  237  note 

Metals,  precious,  368 

Middleman  as  a  timesaver,  316 

Military-defense  argument  for  protec- 
tion, 451 

Mill,  John  Stuart,  328,  589,  655 

Mining,  276 

Miser  and  spendthrift,  574 

Mitchell,  W.  C.,  380  note 

Monasteries,  communistic  organization 
of,  716 

Money,  one  form  of  social  capital, 
191;  a  labor-saving  invention,  364; 
substitutes  for,  365 ;  qualities  in  ma- 
terial of,  367 ;  kinds  of,  in  United 
States,  370;  standard,  372,  375; 


fiat,  380;  quantity  theory  of  value, 
385 ;  speed  of  circulation,  386 ; 
speeding  up  circulation  of,  in  war 
time,  662 ;  circulation  of,  in  war 
time,  673 

Monopoly,  363 

Morality,  teaching  of,  88;  different 
views  of,  725 

Motives,  transitory,   15 

Mule,  the,  182 

National  banking  system,  405 
National  prosperity,  helps  to,  160 
Necessaries,   584 
"Niggardliness  of  nature,"  354 
Noncompeting  groups,  503 

Obedience  to  law,  134 
Occupation,   influence   of,    284 
Overinvestment   theory  of   crises,  435 
Overproduction   theory   of   crises,   428 
Ox,    displacement    of,    181 ;    historical 
importance    of,    183 

Paper    money,    redemption    of,    377; 

purchasing  power  affected  by  cus- 
tom, 380;  purchasing  power  affected 

by    quantity,   381 
•  Partnership,  213 
Patriotism,  729 

Periodicity  theory  of  crises,  429 
Peschel,  144 
Physiocrats,  731 
Play,    47 ;    distinguished    from    work, 

358 
Population,    balanced,    261 ;    law    of, 

501 

Possession,  priority  of,  in 
Poverty,  and  socialism,  706;  abolition 

of,  766 
Power,   animal,    180,   183,   308;   kinds 

of,  188;  mechanical,  309;  man,  571, 

669 
Prices,    control    of,    221;    fluctuations 

in,   436 
Production,   necessity    of   economizing 

means    of,    45 ;    lengthening   process 

of,  172,  199;  combination  of  factors 

of,    199;    balanced   agents   of,   257; 

importance    of   any    factor    of,   492 
Productivity,  promotion  of,  76 ;  great 

law  of,  282  ;   marginal  and  average, 

477;  relative,  489 
Profits,    distinguished    from    interest, 

528;    meaning    of,    551;    functional 

theory    of,    552 
Progress,  meaning  of,  575 


772 


PRINCIPLES  OF  NATIONAL  ECONOMY 


Property,  follows  freedom  from  vio- 
lence, 103  ;  a  by-product  of  freedom, 
1 06;  ways  of  acquiring,  106;  de- 
velopment of  idea  of,  107 ;  kinds 
of,  114 

Property  rights,  versus  human  rights, 
113;  limitation  of,  116 

Protection,  six  popular  arguments  for, 

444 

Protective  tariff,  some  possibilities  of, 
453 ;  paid  by  consumer,  453 ;  paid 
by  foreign  producer,  454;  prohibi- 
tive, 455;  and  wages,  457;  and  less 
productive  industries,  460 

Quantity     theory     of     money     value, 

385 

Railways,  310;  short-distance  and 
long-distance  hauling,  242  ;  public  or 
private,  310;  monopolistic  character 
of,  311 

Real-estate  boom,  434 

Reasonableness,  132 

Reclamation,   229 

Reconstruction   programs,   713 

Reformers,  two  classes  of,  710 

Religion,   144 

Rent,  meaning  of,  515;  and  diminish- 
ing returns,  521;  law  of,  523; 
determines  selling  price,  523;  dis- 
tinguished from  interest,  527 

Residual  share,  559 

Revenues,  classification  of,  619;  char- 
acteristics of  good  system  of,  623 

Ricardo,  David,  732 

Risk,  necessity  of,  553 ;  irksomeness 
of,  553 

Roads,  188 

Robinson,  Edward  Van  Dyke,  263 
note,  567 

Ross,  E.  A.,   78,  628,  658  note 

Rothamsted  experiments,  479 

Savings  banks,  397 

Scarcity,   meaning  of,  43,  349;  causes 

of,  354;   of  labor,  causes  of,  497 
Scientific  management,  261 
Scignorage,  376 
Self-interest,    definition    of,    21;    and 

public  uses,  33 
Seligman,    E.    R.    A.,    631    note,    635 

note,   659   note 
Services,  professional  and  personal,  51 ; 

philanthropic,  55 ;  nonphilanthropic, 

56 
Silver  standard,  377 


Single  tax,  meaning  of,  731;  as  an 
engine  of  social  reform,  732;  four 
arguments  for,  737 

Smith,  Adam,  85,  166,  167,  178,  326, 
585,  627,  732 

Smith,  J.  Russell,  246 

Sobriety,  130 

Social  income,  distribution  of,  13; 
utilization  of,  14 

.Socialism,  classification  of,  697 ;  an 
authoritarian  program,  697 ;  defini- 
tion of,  698;  distinguished  from 
populism,  699;  distinguished  from 
liberalism,  700;  an  exclusive  term, 
704;  criticism  of,  705 

Society,  stratification  of,  218 

Spartan  communism,  716 

Specie  payments,  suspension  of,  378 

Spencer,  Herbert,  724 

Sprague,  O.  M.  W.,  399 

Standard  of  living,  499,  572;  affects 
price  of  labor,  500;  competitive, 
608;  and  a  high  birth  rate,  763 

Standardization,  321;  and  economy, 
79;  as  a  government  function,  420; 
for  quantity,  421;  for  quality,  421; 
in  the  marketing  process,  423 

Standard-of-living  argument  for  pro- 
tection, 448 

Steam  engine,  187 

Storing  goods,  319 

Strike,  the,  512 

Struggle  for  existence,   59 

Swamps  in  the  United  States,  233 

Taborites,  716 

Taussig,  F.  W.,  172  note 

Tax,  definition  of,  620;  inheritance, 
625;  incidence  of  a,  630;  single,  731 

Taxation,  indirect,  621;  and  monopoly 
price,  621;  double,  623;  graduated 
or  progressive,  626;  canons  of,  627; 
repressive,  628;  minimum  sacrifice 
theory  of,  645 ;  faculty  theory  of, 
649;  socialist  theory  of,  650;  utili- 
tarian test  of,  655;  as  sound  war 
finance,  664;  five  fallacious  objec- 
tions to  war-time,  670 

Teachableness,  133 

Temperate  zones,  advantages   of,   141 

Thrift,  127;  meaning  of,  203;  effects 
of,  204;  and  overproduction,  205; 
argument  for,  210;  in  a  balancing- 
up  labor  program,  689;  and  the 
laborer,  765 

Tides,  power  from,  186 

Tillage,  280 


INDEX 


773 


Time,  importance  of,  154 

Tools,  157;  compared  with  machinery, 

169;     compared     with     consumers' 

goods,  194;  as  consumers'  goods,  578 
Transportation,  cheapening,  242  ;  water, 

305;  types  in  use,  307 
Trust,   the,    220;    superior   bargaining 

power  of,  418 
Trust  companies,  398 

Unions,  trade,  509 ;  industrial,  509 ; 
labor,  510;  federation  of  trade,  510 

United  States,  geographical  advan- 
tages of,  145 

Utilities,  nonmarketable,  81 

Utility,  153;  personal,  315;  form,  318; 
time,  319;  total,  340;  marginal,  340; 
diminishing,  351 

Utopias,  714 

Valuation,  and  exchange,  335  ;  of  goods 
and  services,  471;  of  consumers' 
goods,  685 

Value,  dependent  on  desirability  and 
scarcity,  42;  and  esteem,  337;  and 
price,  338;  economic,  339;  func- 
tional theory  of,  341 ;  determined 
by  scarcity,  343 ;  relation  of  utility 
to,  348;  social,  350;  of  a  man,  569; 
physical  basis  of,  681 ;  location  and 
fertility,  734 


Variable  proportions,  law  of,  473 

Veblen,  Thorstein,  99 

Vice,  as  waste  of  energy,  95 ;  control 
of,  is  sumptuary  legislation,  599;  as 
a  selective  agent,  601 

Violence,   repression   of,  103 

Voluntary  agreement,  versus  compul- 
sion, 69;  and  inheritance,  118 


Wages,    functional     theory    of,    484; 

causes    of    differences    in    different 

occupations,  494 
Walpole,  292 
War,   financing   a,   661 ;   financing   by 

taxation,    664;    financing    by   loans, 

667 

Waste  of  man  power,  87 
Wealth,  ways  of  acquiring,  4,  48;  two 

meanings  of,  40;  and  well-being,  41 ; 

ten   characteristics  of,  46;    right   of 

men  to  accumulate,  92 
Well-being,  social,  12 
Wheels,  308 

Winds,  power  from,  186 
Work,    attitude     toward,     52 ;  distin- 
guished   from    play,    358;    joy    in, 

577;  pride  in,  580 


Xenophon,  n 


ANNOUNCEMENTS 


PRINCIPLES   OF   POLITICAL 
ECONOMY 

By  THOMAS  NIXON  CARVER,  Professor  of  Political  Economy  in 
Harvard  University 

I2mo,  cloth,  ix  +  588  pages 

A  NONTECHNICAL  discussion  of  the  problems  of  nation-building 
designed  by  its  scope  and  style  to  interest  the  general  reader,  and 
fitted  by  its  arrangement  for  classroom  use.  At  no  period  in  the  his- 
tory of  democracy  have  men  been  compelled  to  think  so  seriously  on 
the  question  of  the  strength  of  democratic  nations  as  at  present,  nor 
has  it  ever  been  so  apparent  that  national  strength  is  largely  economic. 
This  book  examines  the  economic  foundations  of  our  national  strength 
and  points  out  some  of  the  more  direct  methods  of  improvement. 

The  discussion  is  aimed  at  the  plain  average  citizen  and  at  the  student 
who  will  be  the  average  citizen  of  the  coming  years,  since  the  people 
themselves  must  understand  the  economic  principles  upon  which 
national  greatness  depends.  The^book  is  particularly  recommended 
for  high-school  seniors  and  for  students  beginning  the  study  in  college. 

SOCIOLOGY  AND    SOCIAL   PROGRESS 

A  HANDBOOK  FOR   STUDENTS  OF  SOCIOLOGY 

By  THOMAS  NIXON  CARVER,  Professor  of  Political  Economy  in 
Harvard  University 

Svo,  cloth,  Sio  pages 

EXTRACTS  from  the  more  significant  writings  on  social  problems 
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to  give  a  systematic  view  of  the  subject.  Although  designed  prima- 
rily for  juniors  and  seniors  in  our  colleges  and  universities  the  general 
reader  will  find  it  most  readable.  It  may  be  used  as  a  textbook,  as 
the  basis  of  a  course  in  sociology,  or  as  a  companion  volume  to  one 
of  the  various  textbooks  already  in  use. 

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Carver :  Elementary  Economics 

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Commons:  Trade  Unionism  and  Labor  Problems  (Second  Series) 

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Gettell :  Introduction  to  Political  Science 

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Johnson  :  Money  and  Currency  (Revised  Edition) 

Keller:   Colonization 

Kimball :  National  Government  of  the  United  States 

Morse  :  Civilization  and  the  World  War 

Orth :  Readings  on  the  Relation  of  Government  to  Property  and. 

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Reinsch :  Readings  on  American  Federal  Government 
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Ripley  :   Railway  Problems  (Revised  Edition) 
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Ward  :  Applied  Sociology 
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